The impact of fiscal policy on inflation rates in Uganda (2017-2022)

Abstract

The study of the impact of fiscal policy on inflation rates in Uganda involves analyzing the relationship between government spending, taxation, and other fiscal measures and the inflationary pressures within the country. This research aims to understand how fiscal policy decisions and actions by the government affect the overall price levels and inflation dynamics in the Ugandan economy in both the short run and long run. Furthermore, this empirical study aims to provide insights into how fiscal policy decisions affect inflation rates in Uganda. The study is based on secondary data collected over the 2017-2022 period. In order to achieve the required objectives, descriptive analysis was done to analyze the characteristics of the variables in the study. In addition, correlation and regression analysis was done. The ARDL model was used to examine both the short-run and long-run effects of the fiscal policy measures on inflation rates. The study found a significant relationship between CPI (inflation) and factors such as Tax revenue and Government expenses. A long-run relationship between the variables in the model was found to exist due to the presence of co-integration. An increase in the Government expenses by 1% led to an increase in the CPI (inflation) by 0.031567% in the long-run and 0.0076311% in the short run. The Tax revenue was not a significant predictor of the CPI (inflation) in both long-run period and short run period. This suggests that changes in the amount of tax revenue generated by the government do not have a direct and substantial impact on inflation rates in the economy. Unlike tax revenue, Government Expenditure was found to have a notable impact on inflation rates in Uganda in both the short run and the long run. Based on my research, the Government needs to consider adopting a more cautious approach to spending by reevaluating the size and the composition of government expenditures so as to avoid overheating the economy. This can be done by setting clear spending limits or adopting rules that link government spending to economic growth or revenue generation for example focusing government spending on productive investments that enhance the economy’s capacity to produce goods and services without necessarily causing inflation.