This paper is concerned with the issue of the intertemporal relationship between revenues and expenditures and the way in which a State Government manages public deficits. In this study, different hypotheses are considered to examine such a problem. The socalled tax-spend hypothesis postulates that government raises tax revenues ahead of engaging in new expenditures. The spend-tax hypothesis, on the other hand, predicts that government first spends and then increases tax revenues to finance their expenditures. There is also the fiscal synchronization hypothesis which suggests that government takes simultaneous decisions about revenues.
The article discusses the relationship between sub-national institutions, policies and economic development in Penang, Malaysia. The three characteristics of the Developmental State which are needed for promoting economic transformation are explored including autonomous and capable bureaucracy, a commitment to economic growth and public-private cooperation. How the Penang State Government influenced the development of its electronics manufacturing sector from the year 1969 on is discussed.