Fiscal Balances and Growth
Fiscal Balances and Growth
long run, low and stable levels of government deficits (the difference between
government revenues and expenditures) and debt are typically associated with higher rates of economic growth.11 In countries with high
deficits and debt, reducing budget imbalances generally increases growth,
even in the short run.12 Since there is less need to create money to finance
government expenditure, the resulting inflation rates for countries with
low budget deficits are often lower.13 Low fiscal deficits also increase the
pool of savings for higher levels of investment, leading to higher economic
growth.14 In addition, low deficits promote growth by reducing the probability
of economic crises caused by concerns about the government’s ability
to service its debt. Indeed, research suggests that the macroeconomic
stability associated with the absence of such crises yields numerous benefits,
including higher rates of investment, growth, and educational attainment,
increased distributional equity, and reduced poverty.15
The appropriate fiscal policy to promote growth varies, depending on
the economic situation and time frame. Over the long run, fiscal policy
should aim to keep government debt at sustainable levels. In the short run,
the optimal fiscal stance varies, with tightening being appropriate for
countries with substantial fiscal deficits and fiscal expansion (larger
deficits) being appropriate for countries that have achieved fiscal stability
but are experiencing severe economic downturns (as, for example, Asian
countries were during the 1997–99 crisis). In addition, fiscal expansion
may also be warranted in low-income countries with solid macroeconomic
positions (for example, low inflation and budget deficits) that wish to support
higher public spending as part of their poverty-reduction strategies.
This line of thinking is reflected in IMF policy advice. For example,
once the magnitude of the economic contraction in countries affected by
the 1997–99 Asian crisis became clear, the IMF supported a significant
expansion in public spending to bolster economic activity.16 Once the crisis
had subsided, the IMF supported fiscal tightening to help these
economies keep their government debt at moderate levels. Similarly, flexibility in fiscal targets is reflected in the design of adjustment programs in
low-income countries supported by the IMF’s Poverty Reduction and
Growth Facility (PRGF). In practice, this has meant that in countries that
have already achieved low budget deficits and low inflation, adjustment
programs incorporate increases in the deficit to support their povertyreduction
strategies. Deficits in these countries have been programmed
to increase by !/2 of 1 percentage point of GDP, on average, in order to
accommodate high-priority, pro-poor expenditure. In contrast, in countries
that have not yet achieved macroeconomic stability, fiscal restraint has been
more common, with the average deficit remaining roughly unchanged.
Fiscal Dimensions of Sustainable Development
Prepared for
World Summit on Sustainable Development
Johannesburg, August 26–September 4, 2002
Fiscal Balances and Growth - To learn more about this author, visit International Monetary Fund's Website.
Like this article? Share it with your friends
A prudent, sustainable fiscal position promotes economic growth. In the
long run, low and stable levels of government deficits (the difference between
government revenues and expenditures) and debt are typically associated with higher rates of economic growth.11 In countries with high
deficits and debt, reducing budget imbalances generally increases growth,
even in the short run.12 Since there is less need to create money to finance
government expenditure, the resulting inflation rates for countries with
low budget deficits are often lower.13 Low fiscal deficits also increase the
pool of savings for higher levels of investment, leading to higher economic
growth.14 In addition, low deficits promote growth by reducing the probability
of economic crises caused by concerns about the government’s ability
to service its debt. Indeed, research suggests that the macroeconomic
stability associated with the absence of such crises yields numerous benefits,
including higher rates of investment, growth, and educational attainment,
increased distributional equity, and reduced poverty.15
The appropriate fiscal policy to promote growth varies, depending on
the economic situation and time frame. Over the long run, fiscal policy
should aim to keep government debt at sustainable levels. In the short run,
the optimal fiscal stance varies, with tightening being appropriate for
countries with substantial fiscal deficits and fiscal expansion (larger
deficits) being appropriate for countries that have achieved fiscal stability
but are experiencing severe economic downturns (as, for example, Asian
countries were during the 1997–99 crisis). In addition, fiscal expansion
may also be warranted in low-income countries with solid macroeconomic
positions (for example, low inflation and budget deficits) that wish to support
higher public spending as part of their poverty-reduction strategies.
This line of thinking is reflected in IMF policy advice. For example,
once the magnitude of the economic contraction in countries affected by
the 1997–99 Asian crisis became clear, the IMF supported a significant
expansion in public spending to bolster economic activity.16 Once the crisis
had subsided, the IMF supported fiscal tightening to help these
economies keep their government debt at moderate levels. Similarly, flexibility in fiscal targets is reflected in the design of adjustment programs in
low-income countries supported by the IMF’s Poverty Reduction and
Growth Facility (PRGF). In practice, this has meant that in countries that
have already achieved low budget deficits and low inflation, adjustment
programs incorporate increases in the deficit to support their povertyreduction
strategies. Deficits in these countries have been programmed
to increase by !/2 of 1 percentage point of GDP, on average, in order to
accommodate high-priority, pro-poor expenditure. In contrast, in countries
that have not yet achieved macroeconomic stability, fiscal restraint has been
more common, with the average deficit remaining roughly unchanged.
Fiscal Dimensions of Sustainable Development
Prepared for
World Summit on Sustainable Development
Johannesburg, August 26–September 4, 2002
Fiscal Balances and Growth - To learn more about this author, visit International Monetary Fund's Website.
Like this article? Share it with your friends
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