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Fridays Academy: Fiscal Policy and the Poor

Ignacio Hernandez's picture

As every Friday, from Raj Nallari and Breda Griffith's lecture notes.



Fiscal Policy and the Poor

In a developing economy context taxation is generally less effective than spending programs in pursuing pro-growth policies. The rich generally have more options open to them in avoiding high taxes on their income.  Furthermore, even exempting some food items from consumption taxes (VAT) may not benefit the poor as the rich can afford to spend a larger absolute amount on the exempted good, so they derive the largest benefit.  Moreover, there’s always the question of whether the exemption could yield revenue that could be spent in a more pro-poor way.  


On the expenditure side, there is evidence that increased spending on physical and human capital formation can promote economic growth and reduce poverty.  Protecting investment in physical and human capital during times of fiscal consolidation tends to be more sustainable and therefore better for economic growth.  Easterly and Rebelo (1993) show that an increased government expenditure on transport and communication of 1 percent of GDP is associated with an increase in annual per capita GDP growth of approximately 0.6 percentage points.  Increased government expenditure on health and education contributes to the well being of a population and increases worker productivity. Reducing communicable disease also increases worker productivity and helps to promote tourism and attract foreign direct investment.  The World Health Organization (2001) estimate that for each 10 percent improvement in life expectancy at birth, per capita GDP grows by 0.4 percentage points. 


Pro poor budgeting

The national budget is the instrument that governments use to regulate and prioritize public expenditure.  Processes requiring participation of citizens and the poor in resource allocation, expenditure tracking, and monitoring service delivery systems, can help make fiscal institutions more demand-driven and pro-poor. For example, participatory budgeting has been used in many Brazilian municipalities since the mid-1980s. It involves, first, checking that the previous year’s budget was adhered to and in line with stated policies; and second, bringing together people from different geographical areas and interest groups to define expenditure priorities for the next budget. Participatory budgeting has allowed public expenditure to more closely reflect citizens’ preferences. In Itabuna, Brazil, for example, participatory budgeting resulted in a large shift toward investment in water and sanitation, the top priorities expressed by its citizens.  


Attached, a case example from Uganda: Can the poor influence the budget?


Next week we will start looking at monetary and exchange rate policies, and their influence on the poor.


Submitted by Willy Alarcon on
It's clear that invest in physical capital will help to reduce poverty. Because it will allow people to have access to energy, water, communication, etc. But in this time when politics want short term results, how much time a government has to wait to see the results of the investment?

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