Fiscal policy and international trade: empirical evidence from Uganda

Abstract

Fiscal policy is the use of government spending and taxation to influence the economy. It plays a critical role in shaping a nation's economic development. By strategically changing government spending and taxation system, policymakers usually aim at stabilizing the economy, promoting growth, achieving a more equitable distribution of income and to pursue other social and economic goals. This study focuses on investigating the effect of fiscal policy on net exports as postulated by the Mundell-Fleming model. The study used time series data for the period 1990-2021, which was extracted from the World Development Indicators and Uganda Revenue Authority reports. Autoregressive Distributed Lag model and F-bounds test were used to investigate the existence of cointegration between fiscal policy variables and net exports in Uganda. This study found statistical evidence of a negative effect of both tax collection and government expenditure on net exports in the short run while the F-bounds test revealed no evidence for existence of cointegration between the variables of interest. Therefore, the study confirms the vital role of government in promoting production of goods and services in the economy through taxation and its expenditure. On the policy front, there is need for government to consider tax cuts that incentivize investment and export oriented activities. Government should prioritize its expenditure in sectors/areas which directly contribute to export competitiveness such as infrastructure, education, research and development. Key words: Fiscal policy, international trade, Net exports, ARDL, Bounds test, Uganda.