Budget and Mineral Revenues in Botswana

Policymakers have been interested in the area of public finance especially in the issue of potential links among and between government expenditure and revenue. On one side, the access to tax revenue accumulation presents difficulties due to a narrow tax base as most people in developing countries are lowincome earners and tax collection is marred by several loopholes. On the other side, developing countries government expenditures are constantly increasing as they aspire for economic development. This poses a challenge for developing countries given shocks in their main revenue sources. The paper analyses the dynamic relationship between budget, mineral revenue shocks (main revenue source for Botswana) and other major macroeconomic variables in Botswana by applying a VAR approach. It uses quarterly data points from 1995; Q1 to 2011: Q3. Results show that a shock in government expenditure points to a negative relationship between this variable and the revenue variables. This suggests that as the government spends it reduces the tax holdings of the country. It is thus recommended that prudent spending should be done in order to minimize the effects of revenue shocks. Furthermore, an expansionary fiscal policy should ensure that crowding out is kept in check