There has long been an idea fashionable in economic circles that higher taxes and government spending, or higher borrowing, can "crowd out
" private investment - that is, if the government raises taxes in the short or long term, this reduces private consumption. Well, this has surely happened in some cases. But this, from the latest African Economic Outlook
, provides a refreshing alternative view:
"Every effort should thus be made to ensure that aid does not “crowd out”, or discourage, domestic resource mobilisation, in general, and public resource mobilisation, in particular.
Yet, with so much of Africa’s private savings channelled away from productive private investment, or fleeing the continent, the risk of crowding out private savings is relatively limited. Public resource mobilisation actually allows a greater share of savings to remain on the continent and be spent on economic development. One of the dividends of effective tax systems is thus greater ownership of the development process, whereby the government shapes an environment that is more conducive to foreign and domestic private investment, sustainable use of debt and effective use of ODA."
So public investment in roads, education and so on, can lead to a more attractive investment environment, which stimulates private investment and economic activity, and curbs illicit financial outflows, among other things. Get your tax system right, and locals keep more of their money at home. It stands to reason, really.