Fiscal Reforms and Public Investment in Africa

Extending a model by Buffie et al. (2012), we explore the macroeconomic implications of public investment and fiscal reforms in an environment where the tax system is distortionary. We simulate the model for a permanent increase in the rate of public investment under alternative characterisations of the tax regime and where public investment and O&M provision may fall short of their fully efficient levels. The model is also used to examine stylised fiscal reforms including the replacement of a distortionary output tax with a uniform consumption tax and budgetary reforms that restore O&M expenditures to their efficient levels. These experiments clearly demonstrate the material consequences of the tax and public expenditure structures for growth and debt sustainability in African economies.