Question

The economy of Uganda has a budget deficit of USH 500B. This deficit is likely to be funded through domestic borrowing and taxation. Using an appropriate model, explain the macroeconomic implications of such a move.

Answer 1

Taxation is going to create additional pressure on internal businesses and citizens. It will be a restricting fiscal policy, which will not be able to boost economic growth and development. Borrowing on domestic markets will lead to extrusion of private borrowings from domestic financial markets, since governmental borrowings are considered to be safer. In the end, growth of budget deficit will create additional pressure on businesses and obstacles on the way of economic growth and development.