FISCAL POLICY FOR ECONOMIC DEVELOPMENT: AN OVERVIEW

Fiscal Policy, at the reach of public information, is defined to be an estimate of taxation and
government spending that impacts the economy. It is an agent for growth and human development
through the number of different channels it entails. This paper discussed these channels which involved
the influence of the budget deficit on growth or the macroeconomic channels along with the
microeconomic channels that deals with the influence of fiscal policy on the efficiency of the usage of
resource. The paper looked into the developing countries and if these channels work in developing
countries and if empirical data from researches conducted in industrial countries can be applicable to
developing countries.

One relevant idea from the macroeconomic perspective is that to achieve economic growth and
reduce the level of poverty and improvement of social outcomes in developing countries, prudent fiscal
policy must be a saved coin in the purse. It encapsulates low budget deficits and low levels of public
debt. Additionally, economic crises are inevitable to any government’s ability to service its debt, thus,
small budget deficits reduce the risk of this crises. In turn, small budget deficits equalize the rising
interest from bills that can provoke critical social spending. It also ensures that a country’s capacity to
manage its debt is levelled and congruent to the remaining stock of debt. Undoubtedly, managing crises
with macroeconomic stability garners countless benefits and targets the higher rated of investment,
growth, and educational attainment. The paper also paved an idea that fiscal policy must be utilized to
relieve the decreasing rate in output and employment of countries. It also highlighted that researches
from industrialized countries put on that reduction in budget deficits can stimulate growth, most
especially if the level of public debt is relatively high and unsustainable. This means that if a government
reduced borrowing in finance deficit spending, it will push rates down and in turn catalyze higher private
investment. Moreover, with lower interest rates, the values of assets increase and it encourages private
consumption because of the wealth effect. The paper posed the question if the same cycle can be
managed and be applicable in developing countries and in what circumstances will it be manifested.

Scanning the paper, ideas on the expenditure side were also evident. It explained that if we
invest more on education, health, infrastructure, and research and development, long-term growth will
be boosted. A persistent economy is boosted with higher growth since more fiscal resources will be
generated as well as finance spending on human capital. MDGs or the Millennium Development Goals
were touched in this paper. The shift in focus to fiscal policy and human development of public
expenditure paved the way for agreements and resolutions of world conferences in the United Nations.
Since then, these became the measurement for developmental progress. A framework that indicated
achievement of goals to reduce poverty in all its forms.

The paper has five comprehensive topics which are all a compilation of researches with the
analyzation of the correlation between fiscal policy, growth and poverty in countries, particularly the
developing ones. It aimed to provide insights into how fiscal policy, as the focus of this paper and its
channels can spike up equitable growth. The paper has been organized to discuss several topics.
Researchers have concluded that compare to industrialized world, adjustments in the fiscal policy can
bolster holistic growth in developing countries suffering from macroeconomic imbalances. These countries
can manage higher economic growth if only there is a higher share of public spending for public
investment. Likewise, in industrialized countries, cutting selected current expenditures triggers higher
growth rates that adjustments based on revenue increases and cuts in more productive countries. Based
on their conclusions, the most pro-growth factor in fiscal consolidations is the trimming of domestic
financing of deficits. Another problem posted in the paper which was also answered was the duration of
the fiscal adjustment program. In industrialized countries, expenditure reductions are the key ingredients
for achieving persistent fiscal adjustment while in low-income areas, protecting capital expenditure during
fiscal adjustment leads to a longer fiscal consolidation as well as increase in the share of current spending
on nonwage goods and services. The paper also managed to answer the channels where fiscal
consolidation affects growth in developing countries. Higher private investment that follows reduced real
interest rates and enhanced price and external stability is the principal channel for the increased growth
in industrial countries while the fiscal adjustment that spurs growth principally through its effect on factor
productivity for developing countries.

As a way to ease debt burden in developing countries, researchers have proposed a framework
for assessing debt sustainability in low-income countries that can be easily adapted to the specific
circumstances of a country and can be used to assess the extent to which existing policies and financing
are consistent with the country’s broader development agenda. This was proposed to alleviate the
retarded growth in developing countries. It has been evident that low-income countries have their debt-
service payments crowd out public spending on essential factors. An idea of whether higher public
spending in the past has actually able to produce improved outcomes spurted in the paper. It was also a
joy to know that there is a positive impact on educational attainment if there is an increase with the
overall spending in education. In addition to that, increased focus on health care spending reduces child
and infant mortality rates. These means that policymakers and government officials need to pay attention
to their budget allocation to different sectors of the society. In contrast it was a pain to know that based
on the results of the researches, the poor have significantly worse health than the nonpoor but also show
that the poor are more strongly affected by public spending on health care. Vouching for education, the
recommendation that there should be proposals to disallow or abolish user prices for basic education in
poor countries must be made is a very strong suggestion. In addition to this, attention must also be
directed to improving the efficiency of spending of existing resources. Their conclusion that the progress
on the MDGs of countries can be made by spending existing resources more wisely. This due to the fact
that relatively, low allocations for primary education, relatively high allocations for curative health care,
and poorly targeted spending that primarily benefits upper-income groups are all symptomatic of
expenditure inefficiencies.

It is mentioned in the paper the formidable challenges that developing countries, like the
Philippines, are facing to implement an efficient tax system which are the large informal sectors, lack of
reliable data that allow for effective monitoring and analysis, ineffective tax administrations and powerful
high-income groups that preclude the introduction of more equitable taxes. In this regard, the structure
of taxation in developing countries need to improve to achieve the MDGs and also the level of revenues
reaped by the tax system. The paper also cited that foreign assistance affects the revenue efforts of aid-
receiving countries because of the loans versus grants. They have implied that loans are used more
efficiently than grants because they are expected to be repaid. As stated in the paper and in relation to
the International Aid and Fiscal Policy, $40-$60 Billion of additional resources annually would be required
to achieve the MDGs.

The researches also delved into the challenges in the presence of aid which are the ability of
governments to keep their exchange rate competitive in the face of large foreign resource inflow, the
difficulties in ensuring sound fiscal management, particularly in the context of weak local government
reporting systems and the potential aid dependence that could result from higher donor flows. The
researchers also generated the idea that if a country has decreasing revenues and increasing demand for
budgetary programs are likely to complicate macroeconomic management for countries that have food
aid. In this regard, food aid fails to act as an equalizer. Special topics were also published in this paper
such as the consequences of armed conflict, terrorism in low and middle- income countries and a
comparison of expenditure management systems in Africa are analyzed.

It is not a new idea to anyone who knows that countries who have struggles within their own
jurisdiction have a lot of things to unravel and improve and of course one of which is their
macroeconomic and fiscal policy. As part of the basic consideration to run their respective governments,
this is a special challenge. Post-conflict countries like Iraq, Afghanistan and the Democratic Republic of
Congo must have a foundation with their policy stance to establish the stability of their respective
economies. Researchers have shown that countries abovementioned suffer a lot in which affects their
growth directly and indirectly. In contrast, they also concluded that countries who tackle terrorism and
end internal conflicts have higher economic gains in terms of economic growth, macroeconomic stability
and the generation of tax revenues to support poverty-reducing spending. This leads to the potential for
the peace efforts to pickup their dividends for its contribution to economic development.

Fiscal policy can be an agent of holistic growth to any countries but since not all countries have
strong institutions, it will be ineffective if it’s left unaddressed hence, they will not attain the desired
MDGs for their respective countries. A country’s way of spending their money is also as essential as the
aforementioned idea. It will ensure that the aid flows a country receives must be efficiently spent on
programs to reduce poverty and improve their social indicators. The paper believes that the players in the
budget process play a key role for the significant improvements to manifest. The situation in Africa,
although a domestic issue, can pave the way for the international community to offer solutions by
understanding their struggles and learn from it also. There should be continuous improvements in public
expenditure and management and visibly enforce rules with conviction and rigor and if applicable, apply
sanctions accordingly.

In general, the paper went through and focused on several channels that spur fiscal growth
through fiscal policy. Some of which are the assessment on how fiscal policy affects growth in both the
industrialized and developing countries, rationale in reductions in the budget deficit and whether it is
good for growth, and under what conditions can it be even bolstered for holistic growth of low-income
countries. It also discussed the persistence of fiscal adjustment efforts and the channels through which
changes in the fiscal stance affect growth. The conditions under which borrowing and the resulting debt
buildup is conducive to growth, and the conditions that influence debt sustainability in a country.
Additionally, topics such as the expenditure policies and the Millennium Development Goals or MDGs,
focusing on health and education spending. The taxation, revenue composition, and the impact on
growth and the poor were also highlighted. Researchers were also able to examine the roles of
international aid and the potential difficulties for fiscal management in the presence of large donor
inflows and the fiscal consequences of armed conflict and terrorism, and public expenditure management
systems in Africa.