The effects of fiscal and financial policies on private consumption in Tanzania: 1966 - 1997.

This study utilises a macroeconomic framework, and Rossi {1988) model to investigate the effect of fiscal, financial and social security policies on private consumption in Tanzania since 1966. Its objective was to investigate how these macroeconomic policies have affected households living standard. The study employs quantitative analysis of estimating the impact of selected variables on private consumption expenditure. It was found that current values of social security benefits and personal income excluding social security benefits have significant positive impact on private consumption. The impact of past real deposit rates were found to have a positive marginal significant effect. Current real deposit rate was found to have a negative impact. The current values of external debt servicing, and the dummy for the monetization of fiscal deficit were found to have a significant negative impact. The financial repression policy in the 1966-1990 period resulted in the government not paying attentions to the problem of inadequacy benefits paid to members of contributory social security schemes (and the problem continues to persist). The higher value of the coefficient of disposable income indicates that a larger fraction of initial increase in income is spent on current consumption, leaving very little to finance future consumption. Since most households do not have a higher valued financial savings, the tight fiscal policy adopted in 1985, monetary policy in 1995; and the crisis of external debt servicing since 1980s, have resulted in dramatic fall of average households' living standard in the country. These findings imply that social security policy should be reformulated. Tax policies should be revised in order to set appropriate number of personal consumption tax and tax rates; with the government unearthing other source of revenue. Basic social services should continue to be subsidised. Households should save in order to finance future consumption. Monetization of fiscal deficit, poor borrowing policies, and mismanagement of public funds should be avoided. However, a desired fraction of money should be released in order to stimulate the economy. Moreover, informal sector should be strengthened through fiscal and micro-finance policies in order to reduce the problem of unemployment.