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.