Introduction to Fiscal Space Assessment

 

1.   Defining the fiscal space

The fiscal pace is defined in various ways considering various factors. One of the most acceptable definitions for the fiscal space is “the room to raise spending or lower taxes relative to a pre-existing baseline, without endangering market access and debt sustainability” (IMF, 2018).

Fiscal space depends on multiple factors such as,

q  Availability of financing with favorable terms

q  Risk of market and increasing financial cost

q  Debt sustainability

q  Public financing needs

There are two main wheels in the fiscal space named macroeconomic stability and fiscal sustainability.

 

2. Fiscal space assessment

 Main steps to be followed in fiscal space assessment can be shown as follows.

       I.  Macroeconomic context analysis

 In macroeconomic context analysis, various factors such as the current state and trends in the economy, domestic and external factors and trends, and structural gaps should be analyzed.

 

     II.  Market access analysis

 Various factors such as availability of financing cost of financing and market risks for financing should be analyzed.

 

    III.  Debt sustainability analysis

Debt burden over medium-term and long-term and sustainability of public debt are the key factors to be considered in debt sustainability analysis.

 

   IV.    Fiscal sustainability analysis

Medium and long-term fiscal adjustment needs, implications on macroeconomic outcomes, level and trajectory of fiscal variables (debt and gross financing needs) are some of the important areas to be considered under the fiscal sustainability analysis.

 

     V.   Analysis of country specific factors

 Some of the important factors to be concerned in analysis of country specific factors are demographic patterns, governance trends, country ratings and political stability.

 

3. Indicators for fiscal space assessment

The indicators that can be used in each step of fiscal space analysis can be listed in the following table.

4.     

4.      4. Assessment and recommendations

 Following table shows the recommendations that can be derived based on fiscal assessment.

Written by Deveconomics