Can They Do It All? Fiscal Space in Low-Income Countries

IMF Working Papers, May 5, 2017

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Can They Do It All? Fiscal Space in Low-Income Countries

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Bibliographic details

• Authors: Anja Baum, Andrew Hodge, Aiko Mineshima, Marialuz Moreno Badia, Rene Tapsoba
• Published: May 5, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781475599046.001

Overview

• According to U.N. estimates, low-income countries will have to increase their annual public spending by up to 30 percent of GDP to achieve the Sustainable Development Goals (SDGs).
• The paper develops a new metric of fiscal space in low-income countries that accounts for macroeconomic uncertainty to assess whether those spending needs can be accommodated.
• Illustrative simulations based on this methodology imply that, even under benign conditions, the fiscal space available in low-income countries is likely insufficient to undertake the spending needed to achieve the SDGs.
• Improving public investment efficiency and domestic revenue mobilization can somewhat narrow the gap but it will require major efforts relative to recent trends.

Methodology

• Development of a new metric of fiscal space for low-income countries that explicitly accounts for macroeconomic uncertainty.
• Use of illustrative simulations based on the proposed metric to evaluate accommodation of SDG-related spending needs.

Key Findings

• Spending requirement: up to 30 percent of GDP increase in annual public spending (U.N. estimates) to achieve the SDGs.
• Even under benign conditions, fiscal space in low-income countries is likely insufficient to meet SDG spending needs.
• Potential partial offsets:
  • Improving public investment efficiency.
  • Domestic revenue mobilization.
• Caveat: Narrowing the financing gap will require major efforts relative to recent trends.

Policy Implications and Recommendations

• Focus on improving public investment efficiency to get more output from existing public investment spending.
• Strengthen domestic revenue mobilization to expand the available fiscal envelope.
• Recognize that substantial and sustained policy efforts are required; incremental changes consistent with recent trends are unlikely to be sufficient.

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