Do Budget Deficit Crowds out Private Investment: A Case of Tanzanian Economy

The existing high budget deficit in the Tanzanian economy has created an immense concern among economic policy analysts. The study investigates whether budget deficits crowd out or crowd in private investment in Tanzania, using annual data covering 1970 to 2012. The Johansen cointegration test suggests at least one cointegration vector among these variables. Under such circumstances, we employed a vector error correction model (VEC), since it offers better information than other data generation processes. The results point to a close long–term relationship between private investment and other variables included in the study. Results suggest that budget deficits significantly crowd out private investment. These results substantiate the theoretical predictions and are also supported by previous studies. The paper recommends that the government should redirect its fiscal policy to favor the private investor by discouraging high government expenditure and maintaining a low budgetary deficit. Also, the capital market should be used to finance the budget deficit to avoid the crowding effect.