Optimal Fiscal Policy, Economic Growth and Welfare: Evidence from Time Series Data of the Mozambican Economy

Abstract

This article analyzed the need to implement optimal fiscal policy in order to ensure the maximization of the economic growth rate and well-being in Mozambique. For this, we were inspired by the model of Turnovky (2000a), which we changed by inserting the budget deficit hypothesis. Using the time series approach between 1980 and 2020, the results of the different equations of the model agreed with the theoretical relationships and the constraints imposed by the model. Within the simplifying assumptions of the model, productive spending in 2022 deviates from its potential level with deviations of around 16% or 10%, depending on whether the government budget is balanced or in deficit. We attest that the taxes considered in this study are collected at lower rates of approximately 4 percentage points for an unbalanced budget. Finally, if all fiscal policy instruments are at their respective potential levels, the economy will guarantee an equilibrium growth rate of around 5%. ceteris paribus.