Fiscal Policy

Context

Fiscal policy – the ways in which a government controls its expenditures and taxation – is a key expression of a government’s compact with the population. The way a country manages its budget affects growth, income distribution, and macroeconomic stability. It is central to the Bank’s twin goals of eliminating extreme poverty by 2030 and boosting shared prosperity in each of its client countries. The World Bank has been a leading source of expertise on fiscal policy issues across the globe, working directly with member countries to navigate the many complexities of achieving more efficient and effective strategies for spending and taxation.

Strategy

The World Bank works with member countries on the full spectrum of fiscal issues, from the nuts and bolts of revenue and expenditure planning to the effective implementation of front-line public expenditures. It also helps policymakers in member countries think through the frontiers of new policy challenges. The World Bank’s experts are stationed around the world and have first-hand knowledge of local circumstances and constraints. They are uniquely positioned to engage on the latest thinking on current fiscal policy issues in the World Bank's member countries. 

Among the new and most pressing fiscal issues to surface as part of the Bank’s country economic work in recent years are a few themes that require new focus.  These include:

Public debt-related issues:

• How can countries balance the high financing requirements for development needs against macroeconomic stability and sustainability concerns?
• How much debt is too much debt?
• To what extent are cross-country benchmarks useful in country-specific policy dialogue?
• How important are countries’ debt management systems and what are the major vulnerabilities in design and implementation?
• What are the important links with other debt-related policies used by the Bank and Fund (e.g., IDA’s NCBP and IMF’s DLP)?

Issues related to aging populations:

• What are the major obstacles to fiscal and pension reform in practice?
• Is it a difficulty in garnering public understanding of the need for reform, or the shorter term horizon of politicians and policy makers compared with the problem long term nature? 
• What can be learned from recent experiences in countries where this is an urgent matter, on how (not) to proceed when conducting a dialogue with the authorities?
• How can we reflect this “learning from experience” when designing a country program?

Issues related to resource-rich countries:

• What drives the low implementation ratio of fiscal rules in resource rich countries? 
• Is there a problem with the design of the rule, e.g. too sophisticated, or too idealistic? 
• What kind of political economy factors determine the successful implementation of the fiscal rules? What are the nuances here?
• How does allocation of power in the society affect the implementation of fiscal rules, e.g. several interest groups vs. a powerful central group vs. an atomic society? 
• What are the optimal strategies to engage with the client in different conditions?

These lines of inquiry need to be pursued by looking at individual countries, developing methodologies for analysis, and learning from and sharing those experiences.

Results

World Bank economists use a variety of methodologies to diagnose and address the constraints to efficient and effective public finance.  Economists use a range of tools to do these analyses.  Some of them are listed below:

·         Public Expenditure Reviews (PERs): This core diagnostic looks at the optimal allocation of public resources – that is, how should the government allocate its limited money so as to maximize economic growth and poverty reduction? There are many ways of analyzing the efficiency and equity of public spending, which is why there is substantial variation in the content of and approaches adopted by different PERs.

·         Policy Notes: This approach tackles individual and unique fiscal challenges at the country level, often through dedicated and tailored analyses.

·         BOOST: This initiative is a Bank-wide collaborative effort launched in 2010 to facilitate access to budget data and promote effective use for improved decision-making processes, transparency and accountability.

·         Fiscal and Debt Sustainability Analyses:  There are several techniques including both deterministic and stochastic frameworks for assessing the sustainability of current and expected policies. This framework also addresses the types and consequences of policy adjustments needed to manage solvency and liquidity risks.

·         Public Expenditure and Financial Accountability (PEFA): The PEFA Program is a multi-donor partnership between seven donor agencies and international financial institutions working to strengthen recipient and donor ability to (i) assess the condition of country public expenditure, procurement and financial accountability systems, and (ii) develop a practical sequence of reform and capacity-building actions.