Tax more or spend less? Asymmetries in the UK revenue–expenditure nexus

Unlike previous research on the causal relationship between government revenues and expenditures in the United Kingdom, this study estimates an asymmetric error correction model within a momentum threshold autoregressive framework over the period 1955–2009. The results indicate that government revenues respond to short-run changes in government expenditures as well as asymmetrically to budgetary disequilibrium. With respect to the asymmetric adjustment, the response of government revenues to a worsening budget is faster (in absolute terms) than to an improving budget. Thus, contrary to previous studies on the UK, the empirical findings lend support for the spend–tax hypothesis.