The Impact of Fiscal Policy on Income Distribution in Tanzania: A Computable General Equilibrium Analysis

Abstract

The Tanzanian government has established a goal to transform the country into a middle-income and semi-industrialized state by 2025. To promote this transformation, the government exempted the Value Added Tax on capital commodities in FY 2017-2018 as a way to promote utilization of these commodities by manufacturing industries and generate growth, employment, and increased incomes. This study analyzes the impact of a reduction in Value Added Tax on capital commodities (electricity, vehicles, machinery, and equipment) under two different closure rules:

(1) fixed governmental expenditures and flexible governmental savings

(2) flexible governmental expenditures and fixed governmental savings.

Under the first regime, government savings declined and industries that depended heavily on government investments suffered. In the second, output increased for all industrial sectors, leading to a decrease in average unemployment. Real consumption increased for all but the richest household categories.

Keywords: Fiscal Policy, Government Budget, Household Income, CGE Modelling, Social Accounting Matrix

JEL Classification: C68, E62, H50, E64