Does Public Expenditure Financing Mode Matter for Economic Growth in Tanzania? A Co-integration and Error Correction Modeling Approach

Abstract

This study examines whether public expenditure financing mode matters for economic growth in Tanzania. The study employed co-integration and error correction modeling approach to explore the short-run and long-run effects of various methods of financing public expenditure on economic growth. The study confirmed that the growth effects of public expenditure depends on its financing mode. The results show that public expenditure financed through tax revenue and non-tax revenue enhance growth. Though tax revenue financed expenditure has a marginal growth effect suggesting existence of high tax rates in Tanzania. Also, the results show that while public expenditure financed through external borrowing bolster growth, government spending based on internal borrowing and grants dampens economic growth. This outcome suggests that grants are tied with conditions that have adverse economic effects to recipient country and that government domestic borrowing crowds out private sector investment. In order to promote growth, government has to increase domestic resource mobilization by widening tax base, controlling tax revenue leakages and tapping more non-tax revenues. Moreover, in case of budget deficit, government revenues should be supplemented by commercial external borrowing rather than internal borrowing and grants.