Investment Scaling-up and the Role of Government: the Case of Benin

This paper studies the fiscal implications for the Beninese economy of scaling up of publicinvestment when the government is subject to inefficiencies on the spending and on the taxcollection side. While scaling up of public investments results in higher long-run output andconsumption levels, a fiscal stabilization package is required in order to preserve fiscalsustainability. A welfare analysis shows that consumers' welfare is increased when thegovernment smoothes the fiscal adjustment via higher borrowing. Moreover, the comparisonbetween several stabilization packages highlights the fact that higher welfare is achieved whenthe government relies mostly on taxation of capital as this allows higher levels of consumption tomaterialize earlier. Lower fiscal costs can however be achieved if the government manages toreduce inefficiency in tax collection. Finally, we consider a change in the trade regime thatcauses a decline in revenues. We find that the higher fiscal burden required to preserve fiscalsustainability would completely wipe out the welfare gain of higher public investments.