Fiscal Policy and Debt Dynamic: Evidence from Tanzania

Abstract

This paper investigates fiscal policy and debt dynamics in Tanzania by using time series data for the period 1970 to 2011. The methodologies adopted include unit root tests, cointegration tests and fiscal reaction function. The three approach employed validate similar results that fiscal policy for Tanzania has not been sustainable for the annual sample period 1970-2011. The unit root tests report that the data generating process of debt follow non-stationary process. Alternatively, in testing the null  hypothesis of no-cointegration, our results show that there is weak  cointegration between government expenditure and revenue which make fiscal policy to be unsustainable. In supporting the ensuing findings, the fiscal reaction function provides evidence that there is negative linear relationship between primary balance and debt relative to GDP. This is additional evidence that fiscal policy has not been sustainable, and the government is advised to take corrective measures to counteract the accumulation of debt.

Keywords: -Ponzi game, Inter-temporal budget constraint, Transversality condition, Fiscal reaction function.