Low Taxation and High Interest Rates-Adverse Consequences for Growth

Through a lowering of tax rates the budget seeks to increase disposable incomes with the private sector and stimulate aggregate demand. However, financial sector reforms have caused a shift at the margin in bank portfolios towards government securities and away from advances to firms leading to high interest rates and credit rationing. Unless the composition of government expenditures shifts towards capital expenditures, there is a concerted effort to raise the tax revenue/GDP ratio, direct measures to boost savings are initiated, risk assessment and monitoring skills of banks are upgraded, and banks are separated from their bad loans, there could be adverse consequences for economic growth.