Budget Balance and Trade Balance: Kin or Strangers A Case Study of Taiwan

Abstract

In line with deterioration in Taiwan’s budget deficit, the trade surplus has also decreased. It is the ideal time to investigate the
relationship between budget balances and trade balances. Unit root tests, cointegration tests, Granger causality tests and the VARs models are
used to test the Keynesian proposition and Ricardian equivalence. The main findings are that the Keynesian proposition is supported by the
data, i.e. the budget balance and the trade balance are kin for Taiwan. There is no support for Ricardian equivalence. This research casts a
warning to the Taiwanese government that without seriously concern about a control of the budget deficit the Taiwanese economy is at risk of
losing its competitiveness in international markets which is an essential factor to keep its economy growing. Two aspects should be
considered. One is to increase the income and the other is to reduce the spending. In terms of the increase in income, the Taiwanese government
needs to scrutinize the current structure of taxation. In terms of a reduction of expenditure, a probe falls on the defense expenditure, diplomatic
expenditure on international recognition and the interior expenditure.