Accelerating Climate Action in Asia and the Pacific: Fiscal Policy Solutions

Accelerating Climate Action in Asia and the Pacific: Fiscal Policy Solutions is structured around four interrelated themes that examine the intersection of fiscal policy and climate outcomes. It explores fiscal resilience amid rising climate vulnerability, the integration of climate priorities into public budgeting and procurement, the use of fiscal instruments to reduce emissions, and the expanding role of climate finance. Through a combination of country case studies and regional empirical analysis, the chapters offer practical insights into policy tools such as environmental taxes, emissions trading systems, climate budget tagging, and innovative financing approaches, providing a comprehensive guide for policymakers.

Edited by: John Beirne, Donghyun Park, Arief Ramayandi, Ulrich Volz 

The findings suggest that Using data from around 100 countries between 1995 and 2019, we examine the impact of climate vulnerability on fiscal risk. We also explore the transmission channels that are important for the relationship between climate vulnerability and fiscal risk. Our results show that in highly climate-vulnerable economies, increased vulnerability leads to higher government bond yields by 0.5 to 1.5 percentage point and lower sovereign debt ratings by up to one notch over two years. These effects are exacerbated by religious tensions as a form of political instability but mitigated by well-developed financial markets. Therefore, even though fiscal consolidation is crucial for containing fiscal risks in the case of climate vulnerability, political stability and financial development also matter.

Jamel Saadaoui, John Beirne, Donghyun Park, Gazi Salah Uddin

The findings suggest that policymakers should prioritize targeted expenditures on health, education, and social protection—areas that directly and disproportionately benefit disadvantaged people—while also strengthening governance mechanisms to ensure resources reach the intended beneficiaries. This can foster more equitable and resilient economic outcomes in both advanced and developing economies.

Gazi Salah Uddin, Anh H. Le, Md. Bokhtiar Hasan, John Beirne, Donghyun Park

Climate change is a top global priority that demands urgent global action. Sizzling, record breaking temperatures around the world are just one piece of evidence that climate change may pose an existential threat to humankind. This topic has given rise to countless active debates among researchers and policymakers alike. The Paris Agreement, which represents a global response to climate change, aims to limit the rise in global temperatures to below 2°C relative to pre-industrial levels. Since its adoption, climate change has taken center stage on the global economic policy agenda.

Anh H. Le, John Beirne, Donghyun Park, and Gazi Salah Uddin

This paper presents evidence that fiscal dominance tends to be more predominant among emerging economies with low central bank independence, especially those without debt rules and with high debt-to-gross domestic product ratios. High foreign currency-denominated debt also leads to fiscal dominance through pressures for exchange rate stabilization policies. Since 2022–2023, interest rate responses to fiscal imbalances have strengthened, posing challenges for future policy.

 

Donna Faye Bajaro, Jaqueson K. Galimberti, Irfan A. Qureshi

From the Asian financial crisis to the global financial crisis, governments and central banks are working together to shore up economic growth and employment, while keeping inflation and government debt in check.

Fiscal stimulus during crises years came in the form of spending and subsidies, which ballooned debt; monetary stimulus arrived through low interest rates and liquidity injections, which flooded economies with cheap credit. Unprecedented government support during the COVID-19 pandemic led to a surge in public debt like never before.

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Donna Faye Bajaro, Jaqueson K. Galimberti, Irfan A. Qureshi

This study analyzes the effects of government expenditure composition on economic growth and income inequality in 91 countries from 1990 to 2023, using a Panel Vector Autoregression (PVAR) model. The findings reveal notable differences between advanced and developing economies. In advanced economies, only infrastructure investment consistently promotes growth, while education spending reduces inequality and healthcare expenditures may increase disparities over time. In developing economies, infrastructure investment has a stronger and more persistent impact on growth, but education and healthcare spending exhibit limited redistributive effects.

Byoung Hoon Seok, Donghyun Park

How did developing Asian economies perform with respect to tax revenue mobilization before and during the coronavirus disease (COVID-19) pandemic? An analysis of data from developing Asia suggests that both short-run and long-run tax buoyancies, a measure of how tax revenue responds to GDP, were close to one before COVID-19, which is indicative of fiscal sustainability. COVID-19 had a negative impact on the region’s gross domestic product (GDP) and thus its tax base, and spurred a significant fiscal stimulus, including tax measures. At a regional level, the pandemic subtracted a tenth of a percentage point from tax revenue growth after controlling for changes in GDP. Using estimated country-level tax buoyancy coefficients, a counterfactual analysis is undertaken to estimate excess tax revenue losses in 2020 due to COVID-19. The average GDP-weighted excess tax revenue loss is about half a percentage point of pre-pandemic GDP.

Samuel Hill, Yothin Jinjarak, Donghyun Park, Maria Hanna Jaber

The coronavirus disease (COVID-19) pandemic put significant stress on health systems and brought to the fore the importance of efficient health spending. Among the subregions of developing Asia, East Asia exhibits the highest technical efficiency. Expanding the service coverage of universal healthcare enhances the realization of health outcomes, while leveraging the concentration of population improves the effective utilization of health budgets. Moreover, Caucasus and Central Asia has the highest allocative efficiency. Overall, developing Asia has substantial room for improvement in efficiency, with a primary focus on technical efficiency.

Donna Faye Bajaro, Yothin Jinjarak, Yuho Myoda, Donghyun Park, Pilipinas Quising

Using panel data, the findings suggest that rising climate-related disaster risks raise government debt and undermine fiscal sustainability, with low-income households bearing the brunt of the impact. According to a New Keynesian Dynamic Stochastic General Equilibrium model, disaster risk generates recessions and increases inequality, particularly among “hand-to-mouth” agents. The paper also shows a considerable increase in sovereign debt due to disaster risk, and it recommends targeted transfers while cautioning against the fiscal cost of progressive taxes.

Le, Anh H. Le, Donghyun Park, John Beirne, Gazi Salah Uddin

The findings highlight the impact on economies most vulnerable to climate change. The results suggest that factors such as political stability and financial development have the potential to alleviate these effects. It reveals that the influence of climate risk on fiscal capacity is more significant in situations of limited fiscal space. Implementing fiscal consolidation emerges as a crucial factor in mitigating the negative impact of climate risks on fiscal capacity, with political stability and financial development also playing pivotal roles.

John Beirne, Donghyun Park, Jamel Saadaoui, Gazi Salah Uddin

Unexpected increases in public debt lead to significant declines in real gross domestic product and increases in inflation. Initial debt levels, domestic financial conditions, and income levels intensify the gross domestic product decline, while tighter global financial conditions mitigate these effects. Inflation impacts vary depending on fundamentals. The paper also identifies nonlinearities in the dynamics, with amplified effects during economic downturns.

John Beirne, Nuobu Renzhi

The results suggest that public investment shocks play a much greater role in boosting economic growth in comparison with private investment shocks. In emerging market and developing economies, including those in Asia, the growth response to investment shocks is positive and much stronger during recessions compared with economic expansions. Investment shocks also stimulate private investment and private consumption.

João Tovar Jalles, Donghyun Park, Irfan Qureshi 

Macroeconomic and institutional factors such as low inflation and strong governance reinforce the growth-enhancing effect of taxes, but these results are conditional on the income level of the economy. The findings of this study imply that the effect of taxes on growth should be evaluated within macroeconomic and structural constraints.

David de Padua, Mae Hyacinth Kiocho, Donghyun Park

An empirical application to developing Asian economies is carried out. There is no one-size fits all type of approach and the sensitivity and discernment regarding specific economies are important in various stages.

João Tovar Jalles