LOW TAXATION AND HIGH INTEREST-RATES - ADVERSE CONSEQUENCES FOR GROWTH

Through a lowering of tax rates the budget seeks to increase disposabl e incomes with the private sector and stimulate aggregate demand. Howe ver, financial sector reforms have caused a shift at the margin in ban k portfolios towards government securities and away from advances to f irms leading to high interest rates and credit rationing. Unless the c omposition of government expenditures shifts towards capital expenditu res, there is a concerted effort to raise the tax revenue/GDP ratio, d irect measures to boost savings are initiated, risk assessment and mon itoring skills of banks are upgraded, and banks are separated from the ir bad loans, there could be adverse consequences for economic growth.