Fiscal Policy Indicator

Description

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

Methodology

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.

MCC’s Fiscal Policy Score = (2017 + 2018 + 2019) / 3

MCC relies exclusively on the International Monetary Fund’s (IMF) World Economic Outlook (WEO) database for Fiscal Policy data. The fiscal policy indicator measures 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. The FY21 score averages the annual data of 2017, 2018 and 2019. As better data become available, the IMF makes backward revisions to its historical data.

The IMF published the net lending/borrowing series for the first time in the 2010 WEO database.

Source

Footnotes
  • 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.