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There are three hypotheses about the relationship between government spending and revenue. The first is the ‘fiscal synchronization hypothesis’, which stipulates a bidirectional causality between government revenue and spending. According to this hypothesis, overtime, spending decisions are made in relation to revenue projections. Expressed differently, spending decisions are not made in isolation from revenue expectations. The second hypothesis is the ‘revenue-spend hypothesis’. According to this hypothesis, the spending level adjusts to change in revenue, implying that the causality runs from revenue to spending. The third hypothesis, which is the ‘spend-revenue hypothesis’, is a reversal of the revenue-spend hypothesis. Thus, it says that it is the change in spending that triggers change in revenue. Empirical evidences with respect to the above three competing hypotheses are at best mixed.
However, given the significance of crude oil resources for human existence and industrial production, and the fluctuations in crude oil prices, the ‘revenue-spend hypothesis’ has been indicated to be most likely relevant in oil producing and dependent (for foreign exchange earnings and government revenue) countries. This expectation was confirmed by Fasano and Wang (2002) for the oil-dependent GCC countries. Nigeria, like these GCC countries, is a major oil producing and dependent economy. Statistics show that oil accounted for over 95% of total foreign exchange earnings and about 87% of government revenue. More importantly, for well over three decades now, budgetary projections and operations in the country have virtually been predicted on oil prices and hence revenue. However, given the nature of fiscal policy and budgeting in Nigeria as well as the character of government over time, it is our contention in line with the widespread public belief in Nigeria, in difference to the conventional postulate and unlike in the GCC countries as reported by Fasano and Wang (2002), that Nigeria is most likely to conform to the ‘fiscal synchronization hypothesis’.
This paper, therefore, tests the validity of this contention and belief over the period 1970-2006 during which crude oil has been a major source of revenue. The test was conducted following the lead in causality studies in the field of public finance. Indeed, the results obtained largely support the ‘fiscal synchronization hypothesis’.
The rest of the paper is organized as follows: it presents a profile of the trend in government revenue and spending during the period under review, followed by a discussion of empirical methodology and results obtained. Finally, the conclusion is offered.
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