There is substantial scope to make budgets more growth oriented. Significant budget imbalances remain in many low-income countries, which have an average central government deficit and debt of 4!/2 percent and 83 percent of GDP, respectively (Table 1). Just under one-fifth of these countries have deficits above 7!/2 percent of GDP and about one-third have debt exceeding 100 percent of GDP. Given the positive relationship between fiscal sustainability and growth, many countries could promote economic growth by embarking on fiscal consolidation.
Low levels of social spending—and lags in social indicators relative to other countries—also indicate that there is room to reallocate public outlays to pro-growth spending. For example, public health spending in the poorest countries is only US$40 per person (in purchasing power parity terms); as a share of GDP, low-income countries spend only about one-third of the Organization for Economic Cooperation and Development (OECD) average (Table 2). This low level of spending is partly reflected in these countries’
health indicators; for instance, average life expectancy is only 55 years, compared with 78 in OECD countries. Spending for education is somewhat more generous in low-income countries (Table 3); nevertheless, low literacy rates (63 percent) indicate significant room for upgrading the human capital and productivity of the workforce. Also, recent estimates of subsidies in non-OECD countries for the exploitation of natural resources and the energy and industry sectors suggest that during 1994–98, the cost of environmentally harmful subsidies amounted to US$340 billion per annum, or 6.3 percent of GDP (Table 4), which was roughly equivalent to total public spending on education and health. Thus, there may be room to further reorient expenditure toward more productive areas.31 Improving the efficiency and targeting of social spending are also essential for promoting growth. Higher spending will only contribute to better health and education outcomes if it is efficient and well targeted—an issue we turn to in the section on “Fiscal Policy, Human Development, and the MDGs.”
Fiscal Dimensions of Sustainable Development Prepared for World Summit on Sustainable Development Johannesburg, August 26–September 4, 2002
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