A Time-Series Investigation of Government Revenue & Expenditure Dynamics in Zimbabwe Using Causality and Variance Decomposition Techniques

Abstract

The causal relationship between government revenue and government expenditure remains a cornerstone issue in public finance, especially within the context of fiscal sustainability and macroeconomic stability in developing economies. This study investigates the direction and strength of causality between government revenue and expenditure in Zimbabwe, a country characterized by persistent fiscal imbalances, structural economic challenges, and institutional fragilities. Between 2010 and 2022, Zimbabwe recorded an average budget deficit of -4.2% of GDP, with a peak deficit of over -11% in 2018, driven largely by unbudgeted public sector wage increases and quasi-fiscal activities. While total revenues have risen ZWL$1.7 trillion was collected in 2022 against a target of ZWL$1.3 trillion expenditures have consistently outpaced revenues, reaching ZWL$2.1 trillion in the same year. This has led to widening fiscal gaps financed through inflationary domestic borrowing, exacerbating macroeconomic vulnerabilities. The study explores the relevance of four dominant fiscal hypotheses: the tax-spend, spend-tax, fiscal synchronization, and institutional separation frameworks. Employing time-series econometric techniques, including the Toda-Yamamoto Granger Causality Test, ARDL Bounds Testing, and Variance Decomposition Analysis, the study utilizes annual data from 1990 to 2024, while controlling for inflation, public debt, and real GDP growth. It also critically engages with empirical evidence from other African economies and re-evaluates earlier Zimbabwean studies that failed to account for structural breaks and monetary policy spill overs. The findings aim to inform ongoing fiscal reform efforts under the Transitional Stabilization Programme (TSP) and National Development Strategy 1 (NDS1), providing actionable policy insights on whether Zimbabwe should prioritize revenue enhancement, enforce fiscal discipline, or adopt a harmonized approach to public financial management to curb its chronic budget deficits and ensure sustainable development.