Fiscal policy is one of the macroeconomic policies which play a decisive role on economic growth; especially in developing economies which have many economic and social bottlenecks. This study examines the impacts of fiscal policy shock on Ethiopian economy; through applying static compatible general equilibrium (Stage CGE) model which allows quantifying the impacts of fiscal instrument shock on the economy and welfare of households. Fiscal problems like small tax revenue and consistent fiscal deficit put its own major influences on developing economies performance.
The study uses 2009/10 Ethiopian SAM as an input for the model and applies three simulation scenarios. In the first simulation, tariff cut affects GDP and household welfare negatively. In the second simulation increasing direct tax has negative impact on total GDP. The other alternative simulation scenario is reducing direct tax and which give a positive change on the total GDP. In general, the government should reduce direct tax to improve economic performance. In addition, liberalizing tariff is not advisable for Ethiopian economy.
Table of Contents
1. INTRODUCTION
1.1. Background of the Study
1.2. Statement of the Problem
1.3. Objective of the Study
1.4. Hypothesis
1.5. Justification
1.6. Significance of the Study
1.7. Scope of the Study
1.8. Organization of the Paper
2. REVIEW OF THEORETICAL AND EMPIRICAL LITERATURE
2.1. Review of Theoretical Literature
2.2. Review of Empirical evidences
2.3. Fiscal Policy in The Context of Developing economy and Its Role
2.4. Conceptual Framework
3. OVERVIEW OF ETHIOPIAN ECONOMY
3.1. Government Revenues, expenditure and Economic performance
3.2. SAM based description of Ethiopian economy
4. DATA AND METHODOLOGY
4.1. Specification of CGE Model
4.2. Model closure and scenarios
5. RESULT AND DISCUSSION
5.1. The impacts of tariff cut on factor income
5.2. The impact of tariff cut on households income and expenditure
5.3.The impacts of tariff cut on macro variables
5.4.The impact of increasing direct tax on household income
5.5. The impacts of increasing direct tax on macro variables
5.6. The impact of reducing direct tax on factors and households income
5.7. The impacts of reducing direct tax on macro variables
5.8.Welfare effects of tariff cut and direct tax policy change
6. CONCLUSION AND POLICY RECOMMENDATION
6.1. Conclusion
6.2. Policy implication
6.3. Limitation of the Study and issues for further study
Research Objectives and Themes
This study aims to examine the impacts of fiscal policy shocks—specifically changes in import tariffs and direct taxation—on the Ethiopian economy and the welfare of its households by utilizing a static computable general equilibrium (CGE) model.
- Analysis of fiscal policy impacts within a developing economy context.
- Evaluation of tariff reduction and its macroeconomic and welfare implications.
- Assessment of direct tax modifications (both increases and reductions) on household income and expenditure.
- Utilization of a 2009/10 Social Accounting Matrix (SAM) for Ethiopia as a primary data source.
- Exploration of policy scenarios to inform government decision-making regarding fiscal deficits and growth strategies.
Excerpt from the Book
2.4. Conceptual Framework
Figure (2.1) shows the circular flow of the economy under government intervention. The study designs this figure for the convenience to conceptualize and analyze the effect of government intervention in the economy through its taxation and spending policy.
Fiscal policy enables the government to direct the economy through expenditures and taxation policies. Governments may want to increase its revenue to finance their budget gap or to mobilize additional resources or stimulate the economy. To achieve this target government, intervene to the economy through fiscal policy. This policy influences households and the economy at large directly or indirectly. To increase government revenue government, change its taxation policies; in such case households affected directly or indirectly. An increase in income tax influences the households through reducing their disposable income and consumptions. In the reverse when government reduce income tax, increases household’s disposable income; this leads to an increase in consumption, saving and stimulate aggregate demand in the economy at large.
On the other hand, government intervenes to the economy through its spending policy. Collected revenues through tax are used to finance public goods such as infrastructure like road, electric utility, communication and others, health care, education, security and other government services. Government also plays an important role through conditional cash or other technical transfer to poor households in the form of safety net programs and other social transfer which enables to improve household welfare. Government can influence firms directly through providing subsidies to promote the economy like tax incentives which is tax holyday, and other incentives. Besides this, Government influences the factor market through reducing unemployment by increasing expenditure to create employment opportunities and directly involves in the factor market through hiring labor and capital goods for public investment.
Summary of Chapters
CHAPTER ONE: Provides the background, statement of the problem, and objectives of the study regarding fiscal policy in Ethiopia.
CHAPTER TWO: Reviews theoretical literature on fiscal policy and empirical evidence concerning its impact on growth and welfare in developing economies.
CHAPTER THREE: Offers an overview of the Ethiopian economy, discussing government revenue/expenditure and providing a descriptive analysis based on the Social Accounting Matrix (SAM).
CHAPTER FOUR: Details the data sources, model specification of the CGE approach, and the simulation scenarios applied in the study.
CHAPTER FIVE: Presents and discusses the simulation results regarding the impacts of tariff cuts and direct tax modifications on factor income, macro variables, and household welfare.
CHAPTER SIX: Concludes the findings and offers policy recommendations, including limitations and suggestions for future research.
Keywords
Fiscal policy, tariff cut, direct tax, Stage CGE model, Ethiopia economy, household welfare, government expenditure, economic growth, tax reform, Social Accounting Matrix, macroeconomic stability, income distribution, WTO accession, trade liberalization, public investment.
Frequently Asked Questions
What is the core focus of this research?
The research focuses on analyzing the impact of fiscal policy shocks, specifically regarding import tariffs and direct taxes, on the overall Ethiopian economy and household welfare.
What are the primary thematic areas covered?
The themes include fiscal policy in developing economies, the use of CGE modeling, government revenue and expenditure patterns in Ethiopia, and the welfare outcomes of different tax policy simulations.
What is the main objective of this study?
The primary goal is to examine how fiscal policy shocks—specifically tariff cuts and changes in direct taxation—affect the Ethiopian economy and the welfare of its households.
Which methodology is employed in this research?
The study employs a static compatible general equilibrium (CGE) model to quantify the impacts of fiscal instrument shocks using the 2009/10 Ethiopian Social Accounting Matrix (SAM).
What topics are discussed in the main body of the paper?
The main body covers theoretical and empirical literature, an overview of the Ethiopian economy, CGE model specification, closure rules for simulations, and detailed results of three specific policy scenarios.
Which keywords best characterize this paper?
Key terms include fiscal policy, tariff cut, direct tax, Stage CGE model, Ethiopia economy, and household welfare.
How does the CGE model handle tariff reduction?
The model classifies commodities into import-competitive and non-import-competitive categories and simulates a 50% tariff rate reduction for all non-import-competitive commodities.
What is the rationale behind selecting a 10% change for direct tax simulations?
The 10% change was chosen as a proxy, reflecting the average annual economic growth rate observed in Ethiopia during the 2010/11 to 2014/15 period.
- Quote paper
- Asmare Workneh Alamrew (Author), 2017, The Impact of Fiscal Policy Shocks on Ethiopian Economy, Munich, GRIN Verlag, https://www.grin.com/document/444906
