Fiscal Expansion, Adjustment and Economic Growth in Tanzania 1967 – 2016

Abstract

The study analyses the effect of fiscal expansion and adjustment on economic growth in Tanzania over the period 1967 to 2016. Use of descriptive analysis was complemented by econometric analysis based on estimation of an error correction model (ECM) conditioned on cointegration test by bounds (ARDL) technique. The bounds test procedure established the variables of the estimating equation were cointegrated. Estimation results revealed the effect of fiscal expansion and adjustment on economic growth over the long-run was negative, inelastic and statistically significant. Shift in fiscal policy regime was obviated by its negative effect on growth during its expansion over the period 1967 - 1992 and its positive effect during its adjustment over the period 1993-2016. Other fundamentals, including inflation, human capital, domestic investment, financial deepening, and economic openness over the long-run had the sign theoretically predicted and were statistically significant. In the short-run the ECM regression results confirm the variables of the estimation model were indeed in equilibrium. Even though, results revealed contemporaneous and three-period lagged effects of fiscal expansion/adjustment on economic growth were negative and statistically significant. The evidence on conditioning factors, were mixed. Generally, the findings suggest increase in government expenditure may not lead to economic growth over the long-run. Among others, and subject to further empirical works, the results underscore importance of price stability for attainment of economic growth.