Abstract:
This study uses time series data of Nepal from fiscal years 1974/75 to 2017/18 to examine the dynamics of the relationship between indirect taxes and government spending. The main objective of the study is to examine the effect size of Value Added Tax (VAT), excise, and customs duties in predicting Nepal’s budget deficit. The data for the study purpose were obtained from the Government of Nepal, Ministry of Finance. The study used a retrospective methodology. The data were first checked for stationarity by employing the Augmented Dickey-Fuller Test, and then the link between the variables was determined using a multiple regression analysis based on ordinary least squares. The results showed that customs charges did not affect government spending in Nepal, while value-added and excise taxes had a statistically significant positive impact. The structural stability of the parameter was evaluated utilizing the CUSUM and CUSUMSQ procedures. The results showed no evidence of misspecification or instability within the period predicted by the model. The residuals follow a normal distribution with no serial correlation, heteroscedasticity, or multicollinearity issues. The main implication of the study finding is that the government should exercise fiscal restraint and prioritize the collection of indirect taxes. Additionally, it recommends reducing customs taxes for new businesses and expanding the range of products subject to VAT. <<<READ MORE>>>
How to Cite
Karki, D., Dahal, R. K., Bhattarai, G., & Gnawali, L. (2023). Structural Stability of the Relationship between Indirect Taxes and Government Expenditure in Nepal: Implications for Fiscal Policy. Journal of Business and Social Sciences Research, 8(1), 35–49. https://doi.org/10.3126/jbssr.v8i1.56582
References
Abdon, A., Estrada, G. B., Lee, M., & Park, D. (2014). Fiscal policy and growth in developing Asia. ADB Economics Working Paper, No. 412, Asian Development Bank.
Acemoglu, D. (2009). Introduction to modern economic growth. USA: Princeton University Press.
Acharya, K. R. (2017). An economic analysis of Government revenue and expenditure in Nepal. Tribhuvan University Journal, 31(1), 51-62.
Adanma, N. J, Ebieri, J., & Sarah, O. E. V. (2019). Impact of indirect taxes on the economic performance of Nigeria (1994-2017). European Journal of Accounting, Finance, and Investment, 5(4), 32-39.
Adnan, A. S. (2014). The impact of public final consumption and investment spending on economic growth in Ethiopia: An application of vector error correction model. Project submitted to the school of graduate studies of Addis Ababa University, Addis Ababa, Ethiopia.
Ahmad, U. G., & Loganathan, N. (2016). The causal nexus between government expenditure and economic growth in Nigeria: Evidence from a bootstrap rolling window approach. The American Journal of Innovative Research and Applied Sciences. Available at www.american-jiras.com.
Akhor, S., & Ekundayo, O. (2016). The impact of indirect tax revenue on economic growth: The Nigerian experience. Igbenedion University Journal of Accounting, 2(1), 62- 87.
Akhor, T. K. (2014). Impact of VAT on economic development of emerging Nations. Journal of Economics and International Finance, 3(3), 2-13.
Atkinson, A. (1977). Optimal taxation and the direct versus indirect tax controversy. The Canadian Journal of Economics, 10(4), 590-606.
Demssie, M. W. (2011). Fiscal policy and economic growth in Ethiopia: An empirical investigation. Thesis submitted to the School of Graduate Studies of Addis Ababa University, Addis Ababa, Ethiopia.
Easterly, W., & Levine, R. (1997). Africa’s growth tragedy: Policies and ethnic divisions. The Quarterly Journal of Economics, 112(4), 1203–1250.
Ekeocha, C. (2010). Modeling the potential economic effects of value added tax reform: Simulation analysis using computational general equilibrium analysis, ECOMOD. Istanbul, Turkey, July, 7-10.
Gebreegziabher, S. (2018). Effects of tax and Government expenditure on economic growth in Ethiopia. Springer Nature Singapore, 87-104. https://doi.org/10.1007/978-981-10-8126-2_5
Goldsmith, A. (1998). Institutions and economic growth in Africa. African Economic Policy Paper, Harvard Institute for International Development, Discussion Paper No.7.
Karki, D. (2018). Stock market responses to macroeconomic dynamics: Testing for long-run equilibrium in Nepal. Pravaha, 24(1), 64-82
Ketema, T. (2006). The impact of government spending on economic growth: The case of Ethiopia. Thesis submitted to the School of Graduate Studies of Addis Ababa University, Addis Ababa Ethiopia.
M’Amanja, D., & Morrissey, O. (2005). Fiscal policy and economic growth in Kenya. CREDIT Research Paper. https://www.nottingham.ac.uk/credit/documents/papers/05-06.pdf.
Mansouri, B. (2008). Fiscal policy and economic growth: Egypt. Morocco and Tunisia compared: Unpublished
Ocran, M. K. (2009). Fiscal policy and economic growth in South Africa. A paper presented at the centre for the study of African economies in a conference on economic development in Africa, March 22–24, in St. Catherine’s College, Oxford University, U.K.
Pesaran, B., & Pesaran, M. (2009). Time series econometrics: Using Microfit 5.0. England: Oxford University Press.
Prasad, U. S. (2015). Nepal’s excise systems and the legal frameworks: Agendas for reform. World Customs Journal, 9(2), 51-70.
Romer, D. (2011). Advanced macroeconomics, 4th ed. Berkeley: University of California.
Shihab, R. A. (2014). The causal relationship between fiscal policy and economic growth in Jordan. International Journal of Business and Social Science, 5(3), 203–208.
Sutihar, D. N. (2014). An analysis of trend and sources of deficit financing in Nepal. Economic Literature, 12, 8-16.
Turner, P. (2010). Power properties of the CUSUM and CUSUMSQ tests for parameter instability. Applied Econometrics Letters, 17, 1049-1053.
World Bank (2017). Nepal development update. Fiscal architecture for federal Nepal. Zagler, M., & Durnecker, G. (2003). Fiscal policy and economic growth. Journal of Economic Surveys. 17(3), 397–418.