Description

This paper studies the fiscal implications for the Beninese economy of scaling up of public
investment when the government is subject to inefficiencies on the spending and on the tax
collection side. While scaling up of public investments results in higher long-run output and
consumption levels, a fiscal stabilization package is required in order to preserve fiscal
sustainability. A welfare analysis shows that consumers’ welfare is increased when the
government smoothes the fiscal adjustment via higher borrowing. Moreover, the comparison
between several stabilization packages highlights the fact that higher welfare is achieved when
the government relies mostly on taxation of capital as this allows higher levels of consumption to
materialize earlier. Lower fiscal costs can however be achieved if the government manages to
reduce inefficiency in tax collection. Finally, we consider a change in the trade regime that
causes a decline in revenues. We find that the higher fiscal burden required to preserve fiscal
sustainability would completely wipe out the welfare gain of higher public investments.

More publications in this series: Working Papers

More publications by: Matteo Ghilardi ; Sergio Sola