Measurement of government budget deficit and fiscal stance in a less developed economy: The case of Tanzania, 1966–1984

Abstract

The use of the conventional government budget deficit as a measure of fiscal inclination and fiscal impact, as has been the case in Tanzania, has been strongly criticized in the literature. Using alternative measures of the government budget deficit this paper indicates that — contrary to the common view of consistent fiscal expansionism — the government has pursued both expansionary and contractionary fiscal stances. The paper notes that the government's contractionary fiscal stance in the 1970s was able to arrest Tanzania's inflation and external imbalances. Since 1979, however, the phenomenon has changed as the economy has experienced a severe foreign exchange crisis and quantity constraints in the goods sector. Accordingly, the relevance of adopting the cyclically adjusted budget framework which may facilitate the coordination of government supply-side responses with the need for financial discipline has been underlined. However, as the paper further demonstrates, the choice of cyclical adjustment ratios and of potential GDP growth rate is important if either the unsustainability of the cyclically adjusted budget magnitudes or undue deflation are to be averted.