Effect of Tax Revenue on Expenditure Allocation of Government Sectors in Southwest State, Nigeria

Abstract

Taxation has been recognized as exerting a significant influence on government expenditures, which constitute a fundamental component of an economy, particularly in numerous developing and underdeveloped nations. Taxes stand out as the primary source of funding for government expenditures. The extent to which tax revenue affect expenditure allocation of government sectors in southwest state, has remained a subject of concern in the Nigerian context. Therefore the study examines the effect of tax revenue on expenditure allocation of government sectors in southwest state, Nigeria. The research design employed in this study is ex-post facto, and data were obtained from audited annual financial reports and budgets of the southwestern states governments spanning a period of forty years, from 1982 to 2022. The study encompassed all six states within the southwest region of Nigeria. Both descriptive and inferential statistical techniques were utilized for analysis. Descriptive statistics, such as minimum, maximum, mean, and standard deviation values, were computed. Variance Decomposition Analysis (VDA) and Impulse Response Function (IRF), integral components of time series regression analysis, were employed to assess all study variables at a significance level of 5%. Regression analysis was conducted to investigate the impact of tax revenue on the allocation of government expenditures across various sectors in the southwest states of Nigeria. The study concluded that there is significant relationship between revenue and expenditure profile of state governments in southwest states, Nigeria. The study therefore recommended that government should explore avenues to diversify revenue sources beyond taxes.

Keyword: Tax, Revenue, Expenditure, Allocation, Government, Southwest State, Nigeria