Strengthening Fiscal Frameworks and Improving the Spending Mix in Small States

IMF Working Papers, June 19, 2015

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Reflecting diseconomies of scale in providing public goods and services, recurrent spending in small states typically represents a large share of GDP.
For some small states, large recurrent spending limits the fiscal space available for growth-promoting capital spending.
Small states generally face greater revenue volatility than other country groups, owing to their exposure to exogenous shocks (including natural disasters) and narrow production bases.
With limited buffers, revenue volatility often results in procyclical fiscal policy, as the econometric analysis shows.
Improving the quality of spending is an important complement to reallocating spending toward capital investment.

Streamline and prioritize recurrent spending to create fiscal space for capital spending.
Improve the quality of spending through public financial management reform.
Adopt multiyear budgeting to improve planning and resilience to shocks.

Subject: Capital spending, Expenditure, Fiscal governance, Fiscal policy, Fiscal space
Keywords: Asia and Pacific, budget-spending rigidity, Capital spending, development spending, expenditure rule, Fiscal governance, Fiscal space, mix in small states, opportunity cost, Pacific Islands, procyclical policies, quality of spending, resilience to shock, revenue, revenue rule, revenue volatility, small state, small states, spending, spending mix, volatility in small states, vulnerability to shock, WP

_wp15124 — Annex II: Fiscal Anchors in Small States
- _wp15124 — Annex II: Fiscal Anchors in Small States (Markdown version)
- _wp15124 — Annex II: Fiscal Anchors in Small States (PDF)