The Keynesian Hypothesis in Vietnamese Provinces: The Instrumental Effect of Tax Revenues

Abstract

The Keynesian Hypothesis posits that public spending fosters economic growth by enhancing infrastructure, healthcare, education, and social welfare. While studies focusing on provincial governance are essential for understanding local policy impacts, the current literature often faces limitations due to data availability. This study is the first to revisit the Keynesian Hypothesis using data from 63 Vietnamese provinces spanning 2012 to 2019. A two-stage least squares approach was used to account for the instrumental role of taxation in the public spending–economic growth nexus. The study confirmed the hypothesis at the provincial level, emphasizing the importance of taxation and budgeting in mediating and sustaining the positive impacts of public spending on economic development. The study indicated that Vietnam continues to operate as a labor-intensive economy, highlighting the urgent need for a transition to a more capital-intensive model. Among other factors, provincial governance competitiveness is crucial for attracting and facilitating businesses, thereby promoting local and national economic growth. Several implications can be drawn regarding the optimization of tax structures, enhancing the effectiveness of public spending, investing in human capital development, and strengthening local governance to create a more favorable business environment. These insights are vital for policymakers aiming for sustainable economic advancement.