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. 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. 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.  High and growing levels of public debt have also led to financial and macroeconomic instability in many countries. Taken together, these factors decrease labor productivity and wages, thereby increasing poverty.
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.
 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.
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