The Distributional Impacts of Fiscal Consolidation in Uganda

While Uganda is considered to be at low risk of debt distress, the stagnant tax effort and large planned capital expenditures might significantly alter this position. This paper employs the dynamic stochastic general equilibrium (DSGE) model to examine tax design issues that arise in addressing debt increases. The results suggest that Uganda may improve it debt position by permanently increasing tax rates by 5 percentage point. However, an increase of consumption tax rates (VAT and Excise) by this magnitude to meet debt reduction is found to be relatively more distortionary affecting consumption, especially for the poor households, in both the short and long run leading to large temporary reductions in the gross domestic product (GDP).