Public Spending, Taxation and Deficits
"The purpose of this study was twofold. First, it tested the causality between public spending and public revenue. Second, it tested the hypothesis that high deficits lead to increased spending. The following conclusions may be drawn from the findings of this study. First, in Tanzania public spending (drives) causes revenue. This finding suggests that one of the causes of the deficits in Tanzania is rapid growth in public spending. This means that measures to curtail deficits must consist mainly of policies to reduce spending. Second, the budgeting process in force is in itself a cause of deficits in Tanzania. The budgeting process has three major problems. The first is the incremental nature or inertial character of government spending. The second is non-enforcement of spending limits (soft budget constraint), which has resulted in mini budgets in recent years. Mini budgets are now turning from the exception to the rule. Finally, there is the large stochastic element on the revenue side, the cause of which is foreign grants. Often these grants are not disbursed as budgeted. All three of these problems may lead to more spending and less revenue and consequently to large deficits. Thus, measures to reduce deficits must address all these problems. Third, the findings of this study support the view that the deficits of the Tanzania public sector are a result of rapid growth in public spending. The coefficient of the perceived tax price variable (T/G) reported in this study confirms the dominant role of the public sector in developing countries. The high income elasticity reported in this study implies that income growth is a strong factor in successive increase in public spending in Tanzania in the long run."