Fiscal Policy, Uncertainty and Output Growth in Uganda: 1980-2020

Abstract

Does uncertainty inevitably alter how Uganda’s fiscal policy influences the country’s economic growth? Using the most recent datasets and rigorous econometric practice, we offer an empirical response to this fundamental topic. Indeed, several nations frequently tweak their fiscal policies as a way to give countercyclical stimulus during periods of uncertainty. In fact, the operations of fiscal policy fluctuate regularly with the sequence of uncertainty and thus create a two-way interaction between fiscal policy, uncertainty, and output growth. We demonstrate using the Autoregressive Distributed Lag Model that in the presence of uncertainty, tax revenue and expenditure are most affected, whereas borrowing is least affected both in the short and long term. Consequently, the fragility of rising global and domestic uncertainty is destined to generate huge and considerable divergences between the predicted and the actual growth outturn unless government’s macroeconomic frameworks adequately include economic uncertainties into the estimates. As a result, we urge that government borrowing be used as effectively as possible to promote and maintain growth. While tax revenues have been shown to promote growth in both the short- and long-term, the effect will inevitably diminish in the face of uncertainty.