99 / 09 Are Budget Deficits Excessive in the UK ?

In this paper we apply a thorough cointegration analysis to annual time-series data for the U.K. in the period, 1948-1997, to examine whether government revenue and expenditure have been congruent. The data do provide considerable evidence of a cointegrated long-run relation between government revenue and expenditure in the U.K. during this period implying that the two have been congruent in the long-run. All the relevant series in our analysis are stationary in their first-difference and there are evidence of structural breaks in most of the series around 1973. The revenue and the expenditure series are cointegrated at the 5% level if allowance is made for changes in the slope and intercept in the revenue-expenditure relation after 1973 when tests for cointegration are made by the Engle and Granger and by Johansen's multi-cointegration tests criteria.. Some of the results also imply that capital-flows are important in removing budget deficits in the short-run and a balance between revenue and expenditure can be achieved over a longer period.