Tax Evasion, the Provision of Public Infrastructure and Growth: A General Equilibrium Approach to Two Very Different Countries, Egypt and Mauritius

A dynamic multi-period general equilibrium model is used to analyse prospects for growth in two very different countries, Egypt and Mauritius. The advantage of using a single model, when comparing alternative policies across countries, is that it removes the concern that different conclusions are based solely upon model differences, which would be the case with multiple models. Each country faces certain key impediments to growth. In Egypt, the high level of tax evasion reduces the country's ability to carry out growth-enhancing fiscal policies, while the inadequacy of public infrastructure in Mauritius leads to a similar impediment to growth, requiring a fiscal solution. For Egypt, the revolution of 2011 affected growth, particularly because of the impact of a dramatic decline in tourism. In looking at how to increase growth, the focus is on the low rate of tax compliance in Egypt; the study finds that fiscal policies designed to reduce tax evasion are successful in modestly increasing GDP growth. Unlike Egypt, Mauritius has not suffered from any immediate shock, but public infrastructure shortages are bottlenecks in GDP growth, which has slowed in recent years. Therefore, the elasticities of private production with respect to stocks of public infrastructure are examined, and used to implement the general equilibrium model. Modest increases in spending upon public infrastructure, compensated for by corresponding decreases in current spending, were found to lead to increases in real GDP growth. However, beyond certain levels, higher infrastructure spending results in an eventual decline in real GDP growth.