Fiscal reforms and Government revenue in Botswana: an analysis of tax buoyancy and elasticity

Abstract

This paper aims at determining the responsiveness of government revenues to fiscal reforms in Botswana tax system. Public finance uses two measures to analyse the efficiency of the tax system in generating government revenues. Tax buoyancy measures total response of tax revenue to change in GDP while tax elasticity measures automatic response of tax revenue to GDP changes less the discretionary tax changes. The paper addresses the effects of SBI, BURS and introduction of VAT as fiscal reforms aimed at enhancing government revenues. To achieve the main objective, buoyancy and elasticity of the tax system were estimated using ordinary least square (OLS) method on time series data for the period 1980-2014. The Dummy Variable Approach was employed to capture the effects of the fiscal reforms on historical Time Series Data to estimate the elasticity of the Botswana tax system. The study reveals that total tax revenue is neither buoyant nor elastic. The same applies to mining tax revenue, non-mining income tax revenue and customs and excise. Only general sales tax/VAT is buoyant. Further, the estimates of buoyancy are higher than their corresponding elasticities for all the taxes, confirming thereof that most of the growth in revenues has been achieved due to fiscal reforms discussed. Specific objective of the study is to identify the determinant of tax revenue in Botswana. Results from an Ordinary Least Square regression with an error correction term revealed that Gross Domestic Product, Southern African Customs Union Revenues as a ratio of total tax revenue and Non-mining GDP as ratio of GDP significantly determine tax revenue in Botswana. The study concludes that Botswana has an inelastic tax system and that total revenue cannot increase inevitably as national income grows. Therefore, the fiscal reforms were relevant to increasing government revenue. It is recommended that fiscal reforms should be assessed and improved to enhance government revenue such that the Botswana tax system is buoyant and elastic.