The effectiveness of fiscal policy in DR congo: Spending and taxing for macroeconomic impact

1. Introduction

What are the effects of government spending or distortionary taxation (taxes on consump tion, labour, and capital income) on GDP and aggregate demand in the DRC? Does a fiscal expansion lead to a crowding out of household consumption and firm investment in the DRC? These are key questions in the case of developing countries broadly and in the DRC’s economy specifically. This paper aims to answer them. Indeed, on one hand, a fiscal policy (FP) is said to be effective if, following a government spending or a tax cut shock, it leads to an increase in aggregate demand, i.e. an increase in private consumption and investment. If, on the other hand, it leads to an opposite effect (a fall in aggregate demand), it is inefficient (Galì et al. 2007; Coenen & Straub, 2005; Fatás & Mihov, 2001; Baxter & King, 1993; Bouakez & Rebei,2007). Few studies answer without ambiguity the above questions in the context of DRC, including Barhangana (2006); Diwambuena and Boketsu, (2019); Tavulyandanda, (2015); Barhangana (2006) estimates an error correction model with annual data from 1970 to 2000 and finds that FP was highly inefficient during this period. 

This study is complemented by that of Tavulyandanda (2015) which, unlike that of Barhangana (2006), covers the period 2001 to 2015, characterized by an unprecedented strong economic growth in the DRC. Despite the particularity of this period, his study leads to the same results as those of Barhangana (2006). Thus, for these two authors, the ineffectiveness of FP relies on the level and composition of expenditures (current expenditures in large proportion oriented towards imports and other less productive invest ments) and the size of the deficit. The research conducted by Diwambuena and Boketsu (2019) is also complementary, as it covers the period from 1980 to 2017. In contrast to the previous authors, it uses a combination of the TVC-SV and SVAR models and found mixed results. 

Fiscal policy is both strongly and partially effective between 2012 and 2015, with a multiplier f ixed at 2. This partial effectiveness may be attributed to that only the household consumption component increases, while private investment is crowded out. The above contradictory results create ambiguity about the countercyclical (or stabilizing) role of fiscal policy (FP) in DRC’s economy especially in the context of the pandemic or recession for instance. It is in fact difficult to predict whether FP is effective or not because of the divergence of results on the subject. However, assessing the impact of an expenditure or tax shock on aggregate demand is relevant for public authorities to lead the economy toward low unemployment. 

For instance, when the government increases wages (a component of public spending) in a period of recession, the expected effects are that households would demand more goods and services, ceteris paribus. The private consumption would increase while leading f irms to anticipate highly effective demand and to increase labor and capital inputs to meet the new demand. The result is a low unemployment rate and an increase in welfare at the societal level. Consequently, the implication of the aforementioned empirical works in the DRC is that a f iscal or tax shock will either crowd out aggregate demand (Barhangana, 2006; Tavulyandanda, 2015) or increase private consumption and crowd out investment (Diwambuena & Boketsu, 2019). Hence there is a need to reinterview the empirical facts to confirm or refute the above theses, make a contribution to the subject in developing countries based on the DRC case, and suggest political orientations.