This indicator measures the government’s commitment to prudent fiscal management and private sector growth.
Relationship to Growth & Poverty Reduction
Unsustainable fiscal deficits can impact economic growth by raising expectations of inflation or exchange rate depreciation. 1 Fiscal deficits driven by current expenditures decrease national savings and put upward pressure on real interest rates, which can lead to a crowding out of private sector activity. 2 In addition, fiscal deficits either force governments to increase tax rates, reducing the capital available for domestic investment, or to increase the stock of public debt. 3 High and growing levels of public debt have also led to financial and macroeconomic instability in many countries. 4 Taken together, these factors decrease labor productivity and wages, thereby increasing poverty. 5
This indicator is general government net lending/borrowing as a percent of GDP, averaged over a three-year period. Net lending/borrowing is calculated as revenue minus total expenditure.
- 1. Fischer, Stanley. 1993. The Role of Macroeconomic Factors in Growth. Journal of Monetary Economics 32: 485-512. Easterly, W. and Rebelo, S. 1993. Fiscal Policy and Economic Growth: An Empirical Investigation. Journal of Monetary Economics 32(3): 417-458. Easterly, William. 2001. The Elusive Quest for Growth. Cambridge, MA: MIT Press.
- 2. Ahlquist, J.S. 2006. Economic policy, institutions, and capital flows: portfolio and direct investment flows in developing countries. International Studies Quarterly 50(3): 681-704.
- 3. Easterly, W. and Rebelo, S. 1993. Fiscal Policy and Economic Growth: An Empirical Investigation. Journal of Monetary Economics 32(3): 417-458. Ball, Laurence and N. Gregory Mankiw. 1995. “What Do Deficits Do?” in Budget Deficits and Debt: Issues and Options, Kansas City: Federal Reserve Bank of Kansas City, 95-119. Reinhart, C., Kenneth Rogoff and Miguel Savastano. 2003. Debt Intolerance. NBER Working Paper 9908.
- 4. Pattillo, C., H. Poirson, and L.A. Ricci. 2003. Through What Channels Does External Debt Affects Growth? Brookings Trade Forum. Washington D.C.: Brookings Institution Press. pp. 229–58. Elbadawi, I. and K. Schmidt-Hebbel. 1998. Macroeconomic policies, instability and growth in the world. Journal of African Economies 7: 116-168. Burnside, Craig, Martin Eichenbaum and Sergio Rebelo. 2001. Prospective Deficits and the Asian Currency Crisis. Journal of Political Economy 109(6): 1155-1197. Mussa, M. 2002. Argentina and the Fund: From Triumph to Tragedy. Policy Analyses in International Economics 67. Washington D.C.: International Institute for Economics. Cohen, D. 1993. Low Investment and Large LDC Debt in the 1980s. American Economic Review 52: 437–49. Servén, L., 1997. Uncertainty, Unstability, and Irreversible Investment: Theory, Evidence, and Lessons from Africa. World Bank Policy Research Working Paper No. 1722.
- 5. Christiaensen, L., L. Demery, and S. Paternostro. 2003. Macro and Micro Perspectives of Growth and Poverty in Africa. The World Bank Economic Review 17: 317-334. World Bank. 2005. Pro-Poor Growth in the 1990s: Lessons and Insights from 14 Countries. Washington D.C.: World Bank. Lustig, Nora. 2000. Crises and the Poor: Socially Responsible Macroeconomics. Economía 1(1): 1-30.