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Applied Science Reports
www.pscipub.com/ASR
E-ISSN: 2310-9440 / P-ISSN: 2311-0139
DOI: 10.15192/PSCP.ASR.2015.10.1.2226
App. Sci. Report.
10 (1), 2015: 22-26
© PSCI Publications
The Relationship between Government Expenditures and
Gross Domestic Product in Iran during 1960-2007
Sayyed Ehsan Zohoori1, Mansour Zarra Nezhad2
1. Accademic Member of Management Dep, Humanities Faculty, Shoushtar Branch- Islamic Azad University, Khuzestan,
Iran.
2. Shahid Chamran University Of Ahvaz, (and Fellowship at Humanities Colledge Of Islamic Azad University-Shoushtar
Branch-Khuzestan, Iran.
Corresponding author: Sayyed Ehsan Zohoori
Paper Information
ABSTR ACT
The government spending is a variable that explain the public sector
Received: 1 February, 2015
activity in a determined period. It contains the share of Gross Domestic
Product, resources alleviation and infrastructures toward development. It
Accepted: 24 March, 2015
can conduct economic-policy makers to change decisions and methods for
GDP growth not only in the present but also in the future. In this article in
Published: 20 April, 2015
addition to the review of related researches, statistical data of Iran central
bank is used during the years of 1960-2007.Prior to any of applied
econometrics model, the unit-root test of Dickey-Fuller is used ;according
Citation
to the non-stationary of both variables, short-run and long-run coefficients
Zohoori SE, Zarra Nezhad M. 2015. The Relationship
of government expenditures are estimated by Auto Regressive Lag
between Government Expenditures and Gross Domestic
Distributed and Error Correction Model. Results indicate a positive
Product in Iran during 1960-2007. Applied Science
relationship between government spending and GDP, while long-term rate
Reports, 10(1), 22-26. Retrieved from www.pscipub.com
is higher than the short term. To maintain such a trend, the government can
(DOI:10.15192/PSCP.ASR.2015.10.1.2226)
encourage competitiveness, to provide private sector development by
eliminating redundant administrative functions. Furthermore the priority of
state spending is recommended to the infrastructure costs to conduct
different sectors of the economy toward twenty-year prospective targets of
Iran economy.
© 2015 PSCI Publisher All rights reserved.
Key words: Government Expenditures, Gross Domestic Product, Economic Growth,Unit Root test, Error Correction Model.
Introduction
In the recent decades, government expenditures are recognized as the outcome of the government resources
alleviation and a share of gross domestic product. Increasing government expenditures comprises many supportive and
legal aspect of public sector; It provides financial and structural affairs with human resources development that may
evolve economic growth. However this fact is not apparently obvious for all circumstances and in some cases
government expenditures even shows reversed effects in GDP growth(Gwartney & et al. 1998) Moreover in underdeveloped countries government expenditures is aimed to infrastructural affairs while in modern countries other public
welfare services are targeted for citizens (Yavas, 1998)
A lot of similar studies have been done about the relationship between government expenditures and GDP growth
or GDP solely.
Kohansal & et al(2007) have studied about government revenue and expenditures relationship and financial
stability during 1970-2002; UECM model, ARDL method , IBC and granger causality are used. The aftermath is perceived
recommendations as decreasing Iran government incumbency, preventing continuous dept frustrating market activities
which is possible by overcoming government revenues to expenditures annually because it would even influence to
current interest rate.
According to Salehi Esfahani and Pesaran(2008) have studied about Iran economic reforms in 20th century and
government enterprises through accessing to oil revenues, it is resulted that in the absence to aimed sanctions,
entrepreneurship and global policy tends to sustainability.
Pevcin (2004) has investigated the relationship between government spending and economic growth of 12
European countries between 1951-1995, the ratio of government spending shows that 10 percent increase in the state
spending would averagely decrease 1.1 percent in the growth rate that expresses negative correlation between the
development and growth of government since it imposes heavy expenditures to the public sector; however this fact is
proven that any increase in government size due to the administration of public services, have a positive effect on
economic growth, but for any uncontrolled increase in government spending, it would go toward reduction, it comprises
some of taxations that inhibit work, investment, and innovation incentives. State own enterprises of private goods can
App. Sci. Report. 10 (1), 2015: 22-26
either cause such reductions. The research has also discussed about the reduction ranges of the government expenditures of
aimed governments.
A Review Of Government Expenditures Of Iran
Iran general budget is divided into four chapter and twenty clause. The summary of separate chapters include:
personnel costs (salary, wages, benefits and aids), administrative, capital including buildings, machinery installations and
transfer payments (Mohandes,2003).
According to the oil revenues, one of the important note about the government expenditures is that it has
continuously increased regardless to absorption capacity and the potential of the society during 1972-1983 moreover the
budget size could not be healthy spent and distributed. It has evolved actually inflationary effects normally and it is not
only from the continuous deficits but also from the size of government activities and their side effects inflationary budget
including massive liquidity, and the liquidity concentration on nonproductive sectors, significant differences between the
official rate of some goods and free market rates and increasing propensity for consuming. (Azimi, 2005)
600000
500000
400000
Gross Dom estic Product
Governm ent Expenditures
300000
200000
100000
0
60
19
63
19
66
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
19
02
20
05
20
Figure 1. The Trend Of Gross Domestic Product And Government Expenditures during 1960-2007
Source: Data Of Iran Central Bank
Construction costs has been sharply decreased from the 1983 until the end of imposed war, however the current
costs has been increased with a slow growth. In the years after the war, especially during the first development plan
construction and current government expenditures have increased. The main point of the budget costs according to the last
years is a direct relationship between government spending and oil revenues, with increasing oil revenues, government
expenditures has increased oil revenues, while their reduction has caused slight growth construction costs versus current
expenditures that have always been increasing(Behkish,2005).
Considering to the government activities in recent decades the highest size of government is especially obvious in
the boom period of the oil revenues, compared to other years. Revolutionary and War periods coupled with the economic
stagnation, declining the government spending has induced the government size reduction. It is remarkable to explain
expenditures from the viewpoint of development plans; After years of war in the first development plan, the size of
government than have been significantly reduced the previous period until 1993. Despite the government spending,
diminishing the economic growth has multilaterally increased the government size during the second development plan. In
the third Plan period despite the growth of government spending the government size has been reduced in this period.
However, due to the dramatic increase in current expenses of owned enterprises, banks and state-profit agencies, the size
of public sector is larger during the program. Current and development government expenditures has had an all-round
growth in 2005 in compared with 2004. Increasing in funding resources and state-owned enterprises during the first and
second development plans indicates the increasing role of government in post-revolutionary years. During the third plan
the budget of centers affiliated to the state has been reduced, however it has increased in 2005 while it is against the
purposes of the fourth development plan (Central Bank of Iran, 2007).
Iran has attained to a real growth rate more than 4 percent during 4 recent decades, meanwhile approaching to the
sustainable growth after 1980s requires competitiveness, investment growth and promoting non-oil exports. The evolution
of long-term GDP of Iran can be divided into three terms; the first term includes 1960s until 1970s ;approximately 2
decades. The second is the reconstruction period and the last term the growth resumes after 1990s until 2005.One of the
main point is the aftermath of Islamic revolution and eight-year war that induced stagnation with inflationary outcomes
even after passing many years. However in the recent decade until 2005, GDP growth has got better off. The main
23
App. Sci. Report. 10 (1), 2015: 22-26
outcome of these three recent decades is that Iranian economy faces the lack of attracting investment including not only
the internal sector, but also outward looking to conduct it toward the global competitiveness(Hakimian,2007).
Government enterprises and the policy direction has considerable consequence in the economic decision making
whereas a right-wing government aims globally to maximize national income and capital at the nationwide. In contrast the
left wing interested to promote high level growth, in fact it would peruse domestic products by local stocks. It can also
attract foreign investments implying capital saving with competitiveness. Moreover this idea describe that redistribution by
right- wing government would result low welfare this is because the fact of capital redistribution and high wages both
decline productivity at least in a long term; meanwhile the source of income redistribution in a right- wing government is
obtained from tax revenues and this is the second reason implies as the taxes arise consequently the welfare incline more
The versus idea is that a country with modern technology and higher capital mobility may tend a better-off conditions in
public welfare. It is the outcome of innovation profits that the government operates parallel to income redistribution.
(Rehme,2006) In compare with this quotation since Iran economy is dependent to the oil and gas revenues so the
government redistribution is directly and indirectly influenced by these resources. It reveals that in the absence of
innovation reminding institutional equipments and capital mobility the twenty-year outlook would not be feasible;
consequently some of amendments are obligated for state own enterprises to adapt themselves to the annual oil prices
fluctuations in the word.
Methods And Materials
The purpose of this research is to find out the relationship with the size of government activities and the gross
domestic product. Through library studies and advanced statistics the appropriate type of function is determined to express
the form of relationship between government expenditure and GDP. The value of long and short-run coefficient is
estimated for government expenditures during 1960-2007. The distinction between short term and long term is due to the
government spending variations via some of duration effects.
Discussions & Results
For the stationary test of the first auto regressive process, unit root test assumes:
Δyt=a0 + γ.yt-1 + a2t + εt
However for higher order of an autoregressive process and the correlation problem of the stochastic components, the
augment Dickey-Fuller test is concluded as:
p
Δyt=a0 + γ.yt-1 +

βi Δyt-i+1 + εt
i 2
Whereas in the regression, deterministic components would specify the appropriate statistic. The significance of the
intercept and trend would be considered for the stationary test respectively; in the autoregressive process it is important to
select the lag length to achieve stationary (Enders,2004)
Table 1. Eviews Outputs Of Unit Root Test Source: Research Group Calculations
I(0)
I(1)
Regression status
Without trend and intercept
With intercept
Without trend and intercept
G
GDP
0.479
-1.821
-2.306
1.705
-1.958
-1.150
critical
value
0.05
-1.948
-2.928
-3.513
G
GDP
-4.253
-4.474
-4.443
-1.901
-6.940
-7.311
critical
value
0.05
-1.948
-2.926
-3.510
According to the results of Dicky Fuller unit root test, non of both variables; G & GDP in 0.05 area of I(0) are
stationary. In the other word the non-stationary would not be rejected in 0.95 P-value. whereas both variables are
stationary with the first lag, it is not exceptionally proved for GDP without trend and intercept status. So their lag cointegrations are not the same and routine regression methods are not recommended for estimations.
In a time series data when an explanatory variable influence a dependent variable by lags, it would be in a
regression even with dependent variable itself by determined lags. This regression model as autoregressive distributed lag
is:
q
p
Yt = α + δt +

i 1
φiYt-I +β0Xt +

βjXt-j + et
j 1
In the ARDL model p and q are the Y and X lags respectively meanwhile "X" is the only explanatory variable.
While dependent variable and explanatory variable are both co-integrated, the regression in an error correction model
estimate the long run influences;
∆Yt = ψ + λet-1 + ω0∆Xt + εt
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App. Sci. Report. 10 (1), 2015: 22-26
Whereas et-1 and ΔXt are both explanatory variables(Koop,2006).
Diminishing the bias of small sample coefficients is possible by utilizing Auto Regressive Distributed Lags
(ARDL) to apply optimum lags for variables; consequently it would avoid false regression. The best alternative rule for
this study is gained by Schwarz Bayes Criterion (SBC) which saved the lag numbers.
Table 2. Estimation results Of GDP By ARDL Model
variable
GDP(-1)
coefficient
0.706
s.d
0.049
t -statistic
15.295
Source: Research Group Calculations
In consider to results, the lagged variable is GDP, while it is recognized as the dependent variable. Whereas the
aggregation of the lagged variable is less than one, the dynamic model would tend to the long-run equilibrium. This test
would be implemented by t-statistic. The statistic is evolved -4.89 which is significant in 0.95 P-value in compare to
Banerjee, Dolado & Mestre values table. Hence there will be a long-run equilibrium calculated coefficient between Gross
Domestic Product and Government Expenditures which is equal to 4.31.
Error correction model (ECM )expresses the relationship between short run fluctuations to the long run
equilibrium and also indicates equalizing the dependent variable toward the equilibrium point in the next (Koop,2006).
Table 3. Error Correction Model results
Variable
D(C)
D(G)
Ecm (-1)
Coefficient
20324.6
1.014
-0.239
S.D
4795.9
0.242
0.479
t -statistic
4.237
4.183
-4.817
Source: Research Group Calculations
The outcomes of short-run model indicates the significant estimated coefficients and the high value of F-statistic
and D.W equal to 2.27 proves the logic results.
It can be showed R2=0.32 since the ECM term has been evolved as an independent variable. Furthermore the
result indicates 1.014 for Government expenditures that would be approximately adjusted 0.24 of non-equilibrium of a
period to another annually.
Conclutions
This article was related to government spending coefficients for short-term and long term by error correction
method. The direct relationship between these two variables in all cases was specified however a larger peak of long-term
coefficient indicating that the effect of some Government infrastructure expenditures obligates longer period of time to be
effective in the growth production. However according to other studies in this field and outcomes of this research,
decision-making of government activities should be aimed in the present circumstances of Iran economy;
It is worth noting that in undesirable social conditions such as war, famine or floods and earthquakes, the need is
to induce a rapid increase in government expenditures.
After passing the crisis it wouldn't return to its previous path due to the post-war debts and reconstructions costs
In recent decades, Government size has been influenced by the revenue from crude oil exports, revolution, war, postwar
reconstruction and growth of prices. One of the main characteristic of Iran economy is budget dependency to the oil and
gas revenue. It has covered more than 60 percent of total revenue and has been exceeded during 1970s. It has created a
direct impact on governmental structure, economy and has expanded the government size and in countries that have oil
revenues, it increased government intervention in the field of economic affairs. Hence the global oil price fluctuations or
impulses exacerbate instability and has naturally provided the government interventions and therefore increased
government spending in Iran in recent decades.
Considering to aforesaid debates, one of applied proposals is to follow Development Plans decisions specially the
3rd one on prevention of volume state, however confining the size of government, is defined with the devastation of
government duties. Therefore the role of components and administration would be investigated by eliminating extra tasks
and restricting activities level. In this context some of proposals can be outlined parallel to the policies of 44th
constitution's article of Islamic Republic Of Iran; includes developing the non-governmental sectors through
competitiveness and state enterprises assignment, for instance, to transfer companies' stocks and large enterprises, would
help the government to achieve important goals including the speed of economic prosperity, development trends, social
justice and poverty alleviation and would achieve the economic goals of 5th Development Plan and the twenty-year
outlook.
Approaching to these methods, will boom the privatization and competition ability and also encourage
implementation of such reforms, since this reformations would diminish the role of government meanwhile the
ownership and direct management would convert to policy-making, guidance and supervision. By developing expert
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App. Sci. Report. 10 (1), 2015: 22-26
human resources different economic sectors of country will be strengthened to face intelligently with world trade rules in a
gradual and purposeful process.
Another important notice in developing countries like Iran as the main problem, rather than the lack of effective
demand, is the lack of proper use of material and human resources. Therefore the recommendation as an another guidance
is toward the correct direction of public expenditure on infrastructure investments and others such as education incentives,
improving transportation, developing economic sectors correspondingly and proper utilization of natural resources.
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