The experience of the last three decades has conclusively illustrated the linkages between fiscal policy and expenditure management and how the latter moved from what was considered as a marginal factor to the heart of national economic management. The primary goal of expenditure manage- ment is now to secure macroeconomic stability and to effectively buttress the pursuit of fiscal policy in all possible ways. But there are significant differences between countries of the industrial world and the developing
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world in the way in which fiscal policy is formulated and implemented.
An important dimension of fiscal policy is to evolve a countercyclical strategy when needed. In the industrial world, this task is considerably facilitated by the development of automatic stabilizers. In the developing world, there are as yet very few automatic stabilizers and all actions tend to be discretionary in nature. The formulation and implementation of discretionary policy packages takes time, and by the time they are brought into force the developments in the economy may have changed and the policy packages may have lost their relevance. Yet another distinction relates to the state of capital markets. These are well developed in the industrial countries and governments have an advantage in tapping them. In the developing worlds there are very few that have a well developed capital market and, as such, resort has to be made to external borrowing that takes considerable time and, more significantly, provides a prominent voice in policy making to external creditors, and a corresponding loss of economic sovereignty and independence in policy making. A third feature that separates the developing countries, requiring in turn a more cautious approach to policy making and greater resort to risk management approaches, relates to the high level of economic vulnerabilities and their impact on economic stability. Capital inflows and outflows have their own logic and associated uncertainties. A quick and large outflow of capital may require, in several cases, substantial revisions in the fiscal policies and change of directions. The sudden reversals are often difficult in developing countries and as a consequence they tend to be more crisis-prone. These differences illustrate the additional built-in difficulties encountered in developing countries.
In both types of countries the major problem during recent years has been perceived to be the inexorable growth of expenditure and the con- sequent widening budget deficits. Both types have been engaged in the prolonged fight against this tendency and, in the process, the expenditure management system has been given new tasks and new instruments to tackle them. But their effects have been too short-lived and, as noted before, there are several factors contributing to demands for additional expenditure. More specifically there are three factors that merit recognition.
First, the normal demands for additional expenditures have been repressed too long and cannot afford to be kept on a short leash any longer, except at considerable cost to economic growth. Second, there have been steady changes in the demographic factors that have been contributing, in turn, to steady growth in old age pensions and medical care of the elderly.
Third, greater reliance on borrowing has contributed to an increase in gross expenditure. Such reliance leads to short-term comforts and addi- tional mobilization of resources is unavoidable in the medium term.
These factors place additional stress on the expenditure management
machinery that needs to be addressed with other problems that have surfaced during years.
The experience of governments with fiscal stress in both industrial and developing countries shows that the expenditure machinery had little capacity to anticipate the coming fiscal crises, and to prepare itself for dealing with it. Now, however, there are all sorts of indexes that are available to governments to monitor so as to be ready to anticipate the crises. It is important, however, that this aspect is internalized into the management practices and a capacity developed to deal with contingencies.
The experience also shows that the austerity management was far from successful, primarily because it lacked a balanced strategy. Far too heavy a reliance was placed on compression of investment outlays and across- the-board cuts that had unanticipated adverse impact on the delivery of essential services. The system also overlooked the emergence of steady leakages and resorted to escape mechanisms that were working counter to the policy intent. In several cases the restrictions on manpower were compensated through resort to the hiring of consultants; where purchase of machinery was denied, there was a growing resort to leasing of machinery.
Where the budget disciplines tended to be restrictive, extra budgetary accounts were created outside the normal process of control. These factors, which vary in incidence from one country to another, need to be identified, and the management system strengthened to deal with them. Moreover, the experiences also show that, in aiming at a moderation of the rate of expenditure growth, emphasis was placed on ad hoc approaches that essentially missed the contributory factors. In most cases annual increases in expenditure are caused by grade inflation (more positions than necessary), pay revision in anticipation of future cost increases, higher cost of selected categories of equipment, particularly in defense and medical services, and greater resort to domestic borrowing as a means of financing, with the inevitable effect of an increase in program costs. In this context, across-the- board cuts or prolonged suppression of investment outlays are unlikely to have any enduring effect on the growth of expenditures. Rather, the approaches of expenditure management should place more emphasis on fundamental reviews and on reduced borrowing, The experience shows that, as more reliance is placed on public–private partnerships to provide services, and as the third party payments grow relentlessly, the public sector is also losing the battle on the control of payments, because of the growing distance between funding and service provision, on the one hand, and arrangements for the risk sharing, on the other.
If expenditure management is to serve the goals of fiscal policy, it is imperative then that reliance on outmoded instruments is reduced, and greater emphasis placed on the development of new tools aimed at dealing with the new problems.
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