Fiscal Reforms and Public Investment in Africa

Extending a model by Buffie <it>et al</it>. (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.