Discretionary fiscal deficit: The case of Mauritius

Abstract

This paper seeks to provide additional evidence on the discretionary aspects of public sector spending and taxing policies in Mauritius. A game theoretic model is developed to analyse whether budgetary imbalances have been used as a tool for policy making or have they been just accounting imbalances resulting from the governments persuasion in its allocation and distribution objectives. Indeed, data for the period 1973-96 are used to estimate the model. Empirical findings confirm that there was lack of discretionary move towards stabilisation and the implementation of the budget as a policy variable. Also, characteristic roots computed from the reaction functions reveal the erratic behaviour of private spending. Besides, it was not surprising to find out that no co-integrating or long-run relationship exists between public and private aggregate spending. This paper can have great implications in future because continuous budgetary imbalances can make fiscal policy, and hence the economy as a whole, more destabilising

 
Keywords: Fiscal policy, private agents, national budget and deficit.