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
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International Monetary Fund
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The IMF is an international organization
of 185 member countries. It was
established to promote international
monetary cooperation, exchange stability,
and orderly exchange arrangements; to
foster economic growth and high levels of
employment; and to provide temporary
financial assistance to countries to help
ease balance of payments adjustment.
Since the IMF was established its purposes
have remained unchanged but its
operations—which involve surveillance,
financial assistance, and technical
assistance—have developed to meet the
changing needs of its member countries in
an evolving world economy.
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