Having Fiscal Space and Using It

HAVING SPACE AND USING IT: Fiscal Policy Challenges in Developing Economies WHAT IS FISCAL SPACE CAN BE DEFINED AS... FISCAL "the availability of budgetarY resources for a specific purpose...without jeopardizing the sustainability of the government's financial position or the sustainability of the economy" IN PLAIN ENGLISH, IT IS.. SPACE? "room for governments to spend and cut taxes in a sustainable way" HOW WAS FISCAL SPACE CREATED AND USED? Fiscal policy in developing economies has become increasingly countercyclical (or less procyclical) over Countercyclicality of fiscal policY refers to an increase in government spending or cut in taxes during downturns to support economic activity. the 2000s. In conjunction with rapid growth, booms in commodity prices, and improvements in institutional quality, this policy “graduation" allowed developing economies to build fiscal space in the run-up to the Great Recession of 2008-09. The accumulated fiscal space was successfully used to stimulate activity during the Great Recession of 2008-09. RESTORING FISCAL SPACE Overall Fiscal Balance Why the Need to Restore Fiscal 3 (Percent of GDP) Using Fiscal Space Space? -1 Governments must have the resources to support specific spending needs, i.e. fiscal space, to be able to increase spending during cyclical downturns. -2 -3 Rebuilding Fiscal Space -4 Building Fiscal Space -5 2000 02 04 06 08 10 12 This is easier when fiscal space is -) ample and their debt is low. EME FME LIC EME: Emerging market economies; FME: Frontier market economies; LIC: Low income economies. As a result of using fiscal space during the Great Recession of 2008-09, developing economies have yet to restore their buffers to pre-crisis levels. In the event of cyclical downturns in growth, developing economies may want to rely on fiscal policy. Restored fiscal space offers the 4 Many developing economies need to rebuild fiscal space over the medium term, at a pace tailored to country conditions. prospect of more effective fiscal policy when it is needed most. These include cyclical conditions and the presence of constraints to monetary policy, including elevated inflation or financial stability risks. SOURCE: WWW.WORLDBANK.ORG/GLOBALOUTLOOK O WORLD BANK GROUP 14