Government Expenditure and Inclusive Growth: Advanced vs. Developing Economies

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. These results highlight the importance of context-specific fiscal policies, ensuring that spending priorities align with national development goals to achieve both economic expansion and equitable distribution.

Byoung Hoon Seok

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

Public Spending and Inclusive Growth: An Empirical Analysis Across Economies

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

Disaster Risk, Inequality, and Fiscal Sustainability

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

Developing Asia’s Fiscal Landscape and Challenges

Analysis drawing on newly compiled data shows that while tax revenues in developing Asia steadily rose in the 2 decades before the COVID–19 pandemic, they continued to lag well behind high-income economies and some developing peers. The region relies on indirect taxes, creating a relatively efficient but less progressive tax structure, while government expenditures on education and health were comparatively modest.

Eugenia Go, Samuel Hill, Maria Hanna Jaber, Yothin Jinjarak, Donghyun Park, Anton Ragos

Analysis suggests that short- and long-run tax buoyancy in developing Asia were close to one before COVID-19, indicating fiscal sustainability. The study estimates that in 2020 the pandemic caused these economies to lose average excess tax revenue equal to half a percentage point of 2019 GDP. It also finds that tax-to-GDP ratios are projected to improve toward 2030 in a majority of developing Asian economies, other things held constant.

Samuel Hill, Yothin Jinjarak, Donghyun Park

Tax revenue can be increased by improving the collection of existing taxes as well as tapping new areas. On average, economies in the region could boost tax revenues by up to 3% to 4% of GDP.
 
More revenue can be raised through personal income and property taxes. Governments can also raise taxes on harmful products, put a price on carbon emissions, formalize the shadow economy, and collect taxes on the fast-growing digital economy.
 
Fiscal reforms in developing Asia should be supported by better tax administration to make it easier for taxpayers to pay taxes, as well as high-quality public spending to secure public support.
Large Fiscal Episodes and Sustainable Development: Some International Evidence

It finds patterns in the linkages between large fiscal episodes and sustainable development outcomes. The findings suggest that domestic resource mobilization should consider differences in the tax base and government expenditure and their linkages with the sustainable development outcomes.

Joshua Aizenman, Yothin Jinjarak, Hien Thi Kim Nguyen, Donghyun Park

Asian countries have been facing various environmental problems, ranging from air and water pollution to climate change. At the same time, many people seek higher income and further economic development, which requires more government revenue. This paper introduces carbon pricing, environmental tax, and emissions trading schemes, all schemes that can help achieve the two objectives: environmental conservation and revenue raising. The paper reviews experiences from the implementation of these policy instruments from the perspective of raising revenue and the effectiveness in environmental conservation with focus on Asia. Specifically, the experiences in India, Japan, the Republic of Korea, the People’s Republic of China, and Singapore show that governments can raise revenue while reducing emissions. We conclude our paper with policy implications.

T. H. Arimura, M. Chattopadhyay, N. Dendup, and S. (G) Tian

This paper discusses how fiscal policy can help foster more inclusive growth in developing Asia. On average, government expenditures in developing Asia are higher, as a share of gross domestic product, than those in Latin America and the Caribbean. Relative to Latin America, developing Asia spends more on social benefits, but less on education and health. While general government revenues have risen since 2000, they are still not sufficient to fully fund targeted transfer programs and provide adequate in-kind benefits to the population. Against this background, this paper discusses priorities for policy reforms as countries in the region seek more inclusiveness and confront the effects of the coronavirus disease (COVID-19). The paper finds that eliminating inefficiencies in health, education, and public investment, for example, would generate the equivalent of 3% of gross domestic product. Savings from curtailing subsidies for fossil fuels would also generate resources for expanding redistributive spending. Reallocating health spending toward primary care, and education spending toward primary and secondary education, would help lead to more equitable growth. There is also scope to raise spending on social benefits and better target them to the poor.

B. Clements, S. Gupta, and J.T. Jalles

This paper discusses the evolution of key taxes in the past 20 years in developing Asia and fiscal challenges that these countries face in light of the coronavirus disease (COVID-19) pandemic. It presents estimates of tax capacity and tax potential, and discusses the productivity of key taxes in the region. The paper finds that developing Asia has potential to raise more revenues—of up to 4% of gross domestic product on average. While corporate income tax productivity is high vis-à-vis other regions, the same does not apply to personal income tax or the value-added tax. There is potential to raise more revenues by improving the compliance and design of the value-added tax. It is important to ensure that the tax systems in developing Asia become more progressive with expansion of personal income and property taxes. Increased allocations and better targeting of social spending would help offset some of the regressivity stemming from indirect taxes. An important source of revenue leakage is tax expenditures granted by countries in the region.

Sanjeev Gupta, João Tovar Jalles

Corrective taxes are viewed as an effective tool to reduce or deter harmful consumption of alcohol, tobacco, and sugar-sweetened beverages (SSBs), including as “best buys” for the prevention and control of noncommunicable diseases (NCDs) complementing other harm reduction measures, e.g., regulation and health promotion and information. Corrective taxes also support domestic revenue mobilization.

Christopher Lane

The main objective of this paper is to extract practical lessons on increasing tax revenue effort that are relevant to developing countries. Specifically, it focuses on insights from two dimensions: the political economy requirements to generate public support for reform, and the technical factors (nuts and bolts) of substantially increasing tax revenue effort. The general topics covered include the political economy preconditions that facilitate tax reform, how and by whom tax reform should be implemented, the timing of reform efforts, determinants of current tax effort, tax policy choice options, tax administration options, and the enhancement of tax morale and compliance norms. The paper also profiles successful examples of recent tax reforms from 29 countries worldwide. It concludes with lessons from both the literature and these countries’ experiences, empowering reform-minded politicians and administrators to shape their own jurisdictions’ strategies for increasing tax revenue effort.

Jorge Martinez-Vazquez

The rise of the digital economy has challenged the traditional tax systems for all the major taxes, with particular concerns about tax planning by multinational enterprises. The challenges with the taxation of the digital economy have led to tax reform initiatives that could significantly reform the current tax systems and enhance the taxation of the digital economy. This paper considers these reforms and the response of developing Asia to these reforms, and finds that the response has been mixed, with developed countries more likely to adopt the reforms. Despite these reforms, the revenue impact for developing Asia will likely be small. The paper concludes by setting out tax reform strategies that could be adopted in developing Asia to address the taxation of the digital economy.

Peter Mullins