The impact of budget deficit financing on capital formation in Tanzania, 1970-2010

This study examine the impact of budget deficit financing on capital formation in Tanzania from 1970 to 2010.Persistent budget deficit and compounding debt in Tanzania have create a great concern among analyst and policy makers. The analysis was based on secondary annual time series data through the Error Correction Model (ECM) proved that the variables were stationary, though not in levels but in first differences. The empirical results show that there positive and significant relationship between capital formation and budget deficit, money supply growth rate and GDP growth rate. Therefore the government may opt appropriate and fiscal policy in order to allocate money in development expenditure such as infrastructure and development projects like agricultural projects which will finally encourage economic growth in Tanzania. Again the government may opt to finance fiscal deficit through domestic borrowing because it is cheap compared to foreign borrowing since it have low interest rates and therefore macroeconomic objectives such as economic growth, low unemployment low inflation rate and low interest rate will be attained.