UPSI Digital Repository (UDRep)
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Abstract : Universiti Pendidikan Sultan Idris |
The objective of this study is to evaluate the impact of selected macroeconomic
variables on public expenditure in the UAE during the 1975-2020 period, based on the
Wagner (1883) law of increasing state activities. The study employs several estimation
techniques including the Gregory-Hansen cointegration approach, Autoregressive
Distributed Lag (ARDL) bounds testing technique, the Canonical Cointegrating
Regression (CCR), Fully Modified Ordinary Least Squares (FMOLS) estimators, the
Non-linear ARDL (NARDL) method, and the Toda-Yamamoto causality procedure.
The results of the cointegration tests demonstrate the presence of a long-term
relationship between public expenditure and the selected variables. Further, the results
of the different estimation techniques illustrate that oil price, tax burden, fiscal deficit,
outward flow of money and FDI, and interest rate influence the level of public
expenditure significantly both in the short-term and the long-term. Moreover, adopting
the NARDL method, the results suggest that interest rate has an asymmetric effect on
public expenditure, with positive and negative shocks influence public expenditure
level differently. Following the Kuznets hypothesis framework, the results illustrate a
significant inverted ‘U-shaped’ association between fiscal deficit and government
expenditure. This suggests that an increase in fiscal deficit is associated with a rise in
public expenditure till fiscal deficit attains a peak, and then a decline in public
expenditure over and above the peak-point. Furthermore, the Toda-Yamamoto causality
test results indicate a two-way causality from public expenditure to fiscal deficit (and
oil price); a one-way causality running from outflow of money (and outward flow of
FDI) to public expenditure; and a unidirectional causality from public expenditure to
tax burden. The study recommends actions aimed at diversifying the UAE’s public
revenue, strict monitor of tax collection and blockage of tax leakages, reduction of fiscal
deficit, elimination of unofficial remittance flows, promotions of investor-friendly trade
policies, and the stabilisation of the interest. |
References |
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