Public Sector Governance and Accountability Series: Budgeting and ...

256 Salvatore Schiavo-Campo
necessary cuts or other adjustment efforts. Because, however, in developing
countries current expenditures may be as important for growth and poverty
reduction as capital spending (for example, the teachers and the books
needed to make the new school buildings productive), this indicator should
be interpreted with care. Finally, when the investment program is in good
shape, an additional useful indicator is the primary current balance, which
focuses on streamlining and making more effective the noninterest portions
of current expenditure (largely, salaries, subsidies, and goods and services).
Fiscal sustainability and vulnerability
It is essential to underline that the broad objective of fiscal policy is not a
specific level of deficit by any definition, per se, but a fiscal position that is
sustainable in light of policy goals and likely resource availability. A temporary
budget surplus, for example, may mask structural fiscal problems when
the tax base is shrinking, when expenditures are dominated by rigid entitlements,
and when financing possibilities are limited to expensive foreign borrowing.
By contrast, a significant budget deficit may not be a cause for any
concern if it emerges from financing productive investment or—as in postconflict
African countries—is an essential corollary of a reconstruction and
recovery program. Moreover, the terms of financing are especially relevant to
African countries: if, as would be highly desirable, a high proportion of
financing is on grant terms and not tied to specific aid project expenditures,
a higher level of fiscal deficit may be perfectly acceptable. The issue is one of
practical economic policy and not one of fiscal ideology.
Indicators of fiscal sustainability include the ratio of debt to GDP, the
ratio of tax to GDP, and the net unfunded social security liabilities. The calculation
of the deficit on an accrual basis would in principle allow a better
assessment of liabilities and therefore their impact on sustainability. For
developing countries, however, accrual budgeting is out of the question,
owing to its high costs and small benefits, if any. In general, large movements
in apparent net worth of the state can be caused by valuation changes in
assets, such as land, that the government has no immediate intention of liquidating.
Hence, Blejer and Cheasty (1993) argue that it is dangerous to use
net worth measures as targets of fiscal policy in the short and medium terms.
An assessment of fiscal vulnerability is also needed, especially in countries
that benefit from short-term capital inflows and those where loan
guarantees have been given out too generously and without adequate
scrutiny. The standard deficit measures may indicate a healthy fiscal situation
that is in reality fragile. However, guidelines for assessing fiscal vulnerabilities