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Investment Scaling-up and the Role of Government: the Case of Benin

Sergio Sola () and Matteo Ghilardi ()

No 2015/069, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; Public Investment; Government Inefficiencies; Debt Sustainability; Fiscal Policy; Infrastructure; windfall revenue; GDP ratio; utility function; investment buildup; tax Adjusts; capital tax; consumption value; consumption amount; capital share; scaling-up investment; debt profile; Public investment spending; Consumption; Fiscal consolidation; Private investment; Sub-Saharan Africa; West Africa (search for similar items in EconPapers)
Pages: 30
Date: 2015-03-27
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Handle: RePEc:imf:imfwpa:2015/069