Tax reform, government spending: Interplay

TAX reforms have been a focal point of economic discussions in recent years, with governments and policymakers striving to create a tax system that is both fair and efficient.

Fiscal policy, which encompasses taxation and government spending, plays a crucial role in economic stability, affecting everything from inflation and employment to public services and national debt.

As governments work to refine their tax structures, understanding how revenues are generated and allocated becomes essential.

A well-balanced approach to taxation ensures that public funds are utilised effectively while fostering economic growth and social equity.

Public concern and follow-up

A resident of Shinyanga Region James TupaTupa shared his perspective on one of the most critical concerns in the ongoing debates around tax reforms: the transparency of government expenditure.

According to Mr TupaTupa, both citizens and businesses are increasingly demanding greater clarity on how tax revenues are being utilised.

When tax revenues are mismanaged or inefficiently allocated, it not only erodes public trust but also undermines economic growth.

Mr TupaTupa said that a disconnect between taxation policies and government spending priorities often results in budget deficits, escalating borrowing and inefficiencies in the delivery of essential public services.

This misalignment of fiscal policies hampers the overall effectiveness of governance and economic development. Mr TupaTupa further explained that the call for improved transparency has gained significant traction, with citizens insisting on more detailed justifications for how governments allocate public funds.

As concerns grow, the public demands that tax policies be more in tune with the broader economic and social goals of the nation, ensuring that taxes are not just collected but used in ways that genuinely benefit society.

In response to the overwhelming interest from readers regarding the relationship between tax policies and government spending, we are extending our previous discussions on the matter.

Many respondents have pointed out that tax reforms cannot be fully effective unless the inefficiencies in public expenditure are addressed first.

It has become clear that without a careful examination of how government spending aligns with tax collection, reforms will remain incomplete.

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This follow-up aims to deepen the exploration of how government expenditures impact tax structures, identify the challenges governments face when reviewing spending patterns and provide concrete recommendations for policymakers.

As the relationship between tax collection and government expenditure plays a crucial role in a nation’s fiscal health and socio-economic development, understanding and optimising this dynamic is fundamental to ensuring a sustainable and equitable future.

By deepening this conversation, we hope to provide valuable insights into how fiscal policies can be optimised for long-term economic stability and public welfare.

Revenue vs expenditure

Governments depend on tax revenues to fund a wide range of essential services, including education, healthcare, infrastructure and public safety.

The effectiveness of a nation’s tax system is closely tied to how well it aligns with its expenditure priorities. Achieving a balance between tax revenue and government spending is crucial for sustainable fiscal management and the effective delivery of public services.

A tax expert from North Lanarkshire – Scotland, Lachlan Thomson noted the global consensus that the efficiency of a nation’s tax system is intrinsically linked to its expenditure priorities.

He said that when tax systems are not aligned with national spending needs, it can lead to fiscal imbalances. Mr Thomson’s view is echoed by Robert Msuya, an economist based in Mwanza Region, who pointed out that insufficient tax collection often results in budget deficits.

This, in turn, forces governments to borrow, which increases national debt and places pressure on future generations.

To illustrate the complexity of this issue, Mr Thomson referred to the situation in the United Kingdom, where the tax burden has significantly increased in recent years.

His projections indicate that by 2027-28, the UK’s tax burden will reach 38.3 per cent of GDP, a sharp rise due to both historical policy decisions and persistent economic challenges.

Mr Msuya added that if this was to happen, then this high tax burden, combined with sluggish economic growth (with the UK’s GDP growth in the final quarter of the previous year being a mere 0.1 per cent), raise concerns about entering a “doom loop.”

Such a scenario, where slow growth leads to further tax hikes, can perpetuate economic stagnation. On the other hand, Mr Thomson cautioned that excessive taxation, as seen in the UK example, can stifle economic growth, discourage investment and overburden taxpayers.

This over-taxation can lead to reduced business activity and lower consumer spending, ultimately undermining the country’s economic resilience.

Therefore, finding the right balance between tax revenue and government spending is essential for long-term economic health.

A system that promotes both fiscal sustainability and effective public service delivery ensures that governments can meet their obligations without hindering economic growth or placing undue strain on citizens.

Revenue as GDP percentage

A tax expert based in Arusha Region, Ms Jane Mollel said that tax revenue as a percentage of Gross Domestic Product (GDP) is a crucial indicator of a country’s fiscal capacity and overall economic health.

She explained that in SubSaharan Africa, this ratio varies significantly from one country to another, reflecting differences in tax policies, enforcement mechanisms and economic structures.

According to the World Bank, the average tax-to-GDP ratio in the region is approximately 15 per cent, well below the global average of around 34 per cent observed in OECD countries.

Ms Mollel said that South Africa, with a tax-to-GDP ratio of approximately 26 per cent, demonstrates a more extensive tax base and efficient collection mechanisms, allowing for greater public investment in infrastructure, healthcare and social programmes.

In contrast, Nigeria’s taxto-GDP ratio stands at just 10.8 per cent, one of the lowest in the region.

This relatively weak performance, she noted, points to structural challenges such as low tax compliance, a heavy reliance on oil revenues and a large informal sector that remains largely untaxed.

Ms Mollel said that these disparities highlight the urgent need for tax reforms in many African nations, focusing on broadening the tax base, improving collection efficiency and enhancing transparency in government spending to build public trust.

Strengthening these areas can enable governments to generate sustainable revenues for national development without overburdening taxpayers.

Efficiency and equity

Many readers, including Ugandan economist Louis Mugume, have underscored the vital role that tax revenue allocation plays in shaping economic growth and social equity.

Efficient government spending can drive economic development by investing in key sectors such as infrastructure, education and technology, fostering job creation and innovation.

However, Mr Mugume cautioned that inefficiencies—such as administrative bottlenecks, misallocation of funds and escalating operational costs—can undermine these benefits, ultimately weakening the intended impact of tax policies.

Drawing on his experience working with the late Emmanuel Tumusiime-Mutebile, a renowned Ugandan economist and former Governor of the Bank of Uganda, Mugume referenced a study assessing government spending efficiency in Africa.

The study revealed that many African countries struggle with ineffective public expenditure management, leading to poor socio-economic outcomes.

Despite substantial tax revenues, a significant portion of the population still grapples with poverty and food insecurity, highlighting the urgent need for more transparent and effective fiscal policies.

Mr Mugume’s concerns were echoed by a tax expert from Mbeya Region Mr Hassan Hassan, who pointed out that inefficiencies in tax administration are not unique to Africa but also prevalent in developed economies.

He cited the United Kingdom, where the National Audit Office reported a 15 per cent increase in tax administration costs between 2019 and 2024, amounting to an additional £563 million.

The complexity of the UK tax system, combined with a rising number of taxpayers, has led to higher compliance costs for businesses, estimated at £15.4 billion annually.

Mr Hassan argued that such inefficiencies not only strain public resources but also erode trust in the tax system, making tax reforms less effective in achieving their intended economic and social goals.

The issue of equity in taxation was a common theme among respondents. Ms Hidaya Hussein from Pemba stressed that progressive taxation is designed to redistribute wealth and reduce income inequality by imposing higher tax rates on those with greater earnings.

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However, she noted that these benefits are often compromised when public spending fails to adequately support lower-income groups through well-targeted social programmes and essential services.

Ms Hussein said that ensuring tax policies and government expenditure work in tandem is crucial for inclusive economic growth and social stability. Adding to this discussion, financial consultant Harry Samwel, who recently relocated to Songea, Tanzania, highlighted Nigeria as a relevant case study in the interplay between tax policy and government spending.

In January 2025, the Nigerian government proposed a major tax reform aimed at boosting revenue collection and reducing inflation.

Analysts across the country have suggested that this reform should double the value-added tax (VAT) to 12.5 per cent by 2026, while simultaneously exempting essential goods such as food and medicine to shield low-income households from the financial burden.

Proponents of the policy argue that such an overhaul could enhance tax compliance and align Nigeria with global tax standards.

However, critics caution that a VAT increase—if not accompanied by efficient and transparent public spending—could stifle consumption and industrial growth, ultimately negating any fiscal gains.

Taken together, these perspectives underscore the critical need for tax policies that are not only well-structured but also closely aligned with transparent and efficient government expenditure.

Without proper fiscal management, even the most well-intended tax reforms risk failing to deliver tangible benefits to the economy and society at large.

International comparisons

Examining the fiscal strategies of various countries provides valuable lessons in balancing tax revenue collection with public spending to foster both economic growth and social equity.

Countries such as Sweden, Singapore and Germany present different approaches that highlight the diverse ways governments can manage taxes and expenditures to achieve fiscal sustainability and public welfare.

Sweden

According to Mr Lachlan Thomson, an expert from North Lanarkshire, “Sweden’s high tax-to-GDP ratio of 44.3 per cent in 2022 funds its comprehensive welfare system, ensuring free education, universal healthcare and strong social safety nets.

Its progressive tax model, with a top income tax rate of 57.1 per cent, redistributes wealth and reduces inequality.” Despite high taxes, Sweden maintains strong public trust due to transparent governance, with the Swedish National Audit Office ensuring efficient spending.

As Thomson noted, “Sweden’s effective allocation of tax revenues results in one of the highest public sector approval ratings in Europe.”

This approach has supported steady economic growth, with a GDP per capita of 58,000 US dollars in 2022, proving that high taxation, when wellmanaged, can drive both social equity and economic stability.

Singapore

While Lachlan Thomson highlights Sweden’s high-tax, highwelfare model, Ms Jane Mollel presents Singapore’s contrasting approach—delivering highquality public services with a low tax burden.

Sweden’s 44.3 per cent tax-to-GDP ratio funds extensive welfare programmes, whereas Singapore, with just 13.6 per cent, relies on efficient spending and strategic investments to maintain economic stability.

As Ms Mollel explains, “Singapore’s targeted subsidies and disciplined fiscal management minimise waste, while ensuring essential services remain accessible.

This model contrasts with high-tax economies, proving that well-planned spending can sustain economic growth without heavy taxation.”

Both approaches demonstrate that effective fiscal policy is not solely about tax rates but about how revenues are managed.

Sweden’s social equity focus and Singapore’s economic efficiency model offer valuable lessons for policymakers seeking sustainable tax and spending strategies.

Germany

While Sweden, Singapore and Germany all excel in fiscal management, their contrasting strategies fuel debate over the ideal balance between taxation, public spending and economic growth.

According to Louis Mugume, an economist from Uganda, “Germany presents a middle ground, neither Sweden’s hightax welfare model nor Singapore’s ultra-lean government.

Instead, it sustains a strong industrial base while keeping a moderate tax burden.” With a 38.1 per cent taxto-GDP ratio, Germany sits between Sweden’s 44.3 per cent and Singapore’s 13.6 per cent, balancing business-friendly policies with social infrastructure.

Its corporate tax rate of 15 per cent encourages investment, while the wealthiest pay up to 45 per cent to fund critical sectors like education and renewable energy, contributing to Europe’s lowest unemployment rate (3.0 per cent in 2022).

But Germany’s strict “black zero” rule, which bans new debt, remains divisive. Advocates hail it as fiscal discipline, while critics argue it hampers economic stimulus.

So, which model works best? Sweden’s high-tax, highservice system? Singapore’s low-tax, high-efficiency approach? Or Germany’s debtaverse, industrial-strength balance?

Each presents a compelling case, forcing policymakers to confront the inevitable trade-offs between taxation, growth and social welfare.

Balancing Act

The insights shared by experts make one thing clear: aligning tax policies with effective government spending is not simply about tweaking numbers.

It’s about making smart choices that drive economic growth and social equity. Countries like Sweden, Singapore and Germany prove that success comes from strategic decisions, not just raising taxes or slashing budgets.

For Africa and Tanzania in particular, the stakes are incredibly high.

These global lessons are not optional; they are essential. The real question is not whether these models can work, but how quickly we can adapt to them.

Can policymakers act boldly enough to break the cycle of inefficiency and foster real change? The uncomfortable truth is this: without a radical shift, Africa risks falling behind.

In our next article, we will dive into the controversial reforms that are shaking up the system, offering solutions that will challenge the status quo. Stay tuned.

● We want to hear from you! Share your thoughts and experiences on how Tanzania’s tax system should be reformed by reaching out to us at 0655963224 or emailing kelvinmsangi@ protonmail.com Your input is invaluable in shaping policies that are fair, efficient and supporting the work done by the Tax Reform Commission. Let’s work together to create a tax environment that empowers small businesses and drives economic progress for all Tanzanians. Join the conversation today!