Interviews
Good governance helps fiscal policy spur economic growth
03 Jul '07
2 min read
Well-run governments get better results out of their budget resources, according to Fiscal Policy and Economic Growth: Lessons for Eastern Europe and Central Asia, released by the World Bank. The study draws on quantitative analysis and case studies to confirm that more productive public spending, lower fiscal deficits, and greater reliance on non-distorting taxes can spur economic growth.
The report reviews trends in public spending and taxation in Eastern Europe, Turkey, and Central Asia (ECA) since the 1990s and how they compare to trends in high-growth countries elsewhere in the world. Middle-income countries in Eastern Europe typically have bigger governments than comparator countries in Asia or Latin America because of large social transfers.
Primary public spending in Croatia is more than double the size of that in Thailand, and the 8 Eastern European countries that joined the EU in 2004 spend on average three times as much on social transfers as Korea. The lower-income countries in ECA have smaller governments, closer in size to the high-growth comparators.
Once public spending exceeds about one-third of GDP, higher spending is associated with lower growth in countries with weak governance, but no such relationship exists in well-governed countries.
“High levels of public spending are risky when public institutions are weak,” says World Bank Country Manager and report co-editor Aristomene Varoudakis. “Money is less likely to be well-spent, fiscal deficits are more likely to emerge, and higher taxes needed to finance such spending are more likely to distort business and worker decisions.”
The report reviews trends in public spending and taxation in Eastern Europe, Turkey, and Central Asia (ECA) since the 1990s and how they compare to trends in high-growth countries elsewhere in the world. Middle-income countries in Eastern Europe typically have bigger governments than comparator countries in Asia or Latin America because of large social transfers.
Primary public spending in Croatia is more than double the size of that in Thailand, and the 8 Eastern European countries that joined the EU in 2004 spend on average three times as much on social transfers as Korea. The lower-income countries in ECA have smaller governments, closer in size to the high-growth comparators.
Once public spending exceeds about one-third of GDP, higher spending is associated with lower growth in countries with weak governance, but no such relationship exists in well-governed countries.
“High levels of public spending are risky when public institutions are weak,” says World Bank Country Manager and report co-editor Aristomene Varoudakis. “Money is less likely to be well-spent, fiscal deficits are more likely to emerge, and higher taxes needed to finance such spending are more likely to distort business and worker decisions.”
World Bank
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