COVID-19: How Tax Policy Responses Affected Uganda’s Economy

Abstract

We examined the impact of COVID-19-induced tax policy adjustments on Uganda’s gross domestic product. The analysis is based on a Structural Vector Autoregressive (SVAR) model of Ugandan quarterly data (2009 to 2021). We find that a one standard deviation positive tax policy shock has a negative effect on Uganda’s GDP. Likewise, a one standard deviation positive shock on the consumer price index has a negative effect on the GDP. Thus, we recommend that instead of fiscal provisions in tax cuts and deferrals to micro small and medium enterprises (MSMEs) and households, the government should focus more on raising expenditure on the private sector MSMEs and households, which would stimulate private demand and productivity and sustain domestic revenue collections, particularly from MSMEs. We also recommend the stabilization of food prices, which are the main drivers of the consumer price index in Uganda, to raise GDP growth. Our results provide new insights into the effects of tax policy responses on GDP amidst a global health crisis that has muted economic activities.

JEL Classification: B22, C54, E62