Chapter 4


4. Fiscal policy

4.1 Introduction

Fiscal policy refers to the complex of fiscal measures (taxes, subsidies, expenditures) that
governments use to influence the working of the economy. By controlling typically from 15
up to 50 percent of the GDP, the government represents the major single economic force in
any country. Hence, just by volume, fiscal policy has substantial influence on all spheres of
an economy. The economy is affected:

1) by the allocation of budgetary resources to the various fields of public expenditures;
2) by the forms of financing the expenditures;
3) by the balance between government revenues and budget expenditures.

Budget deficits are a major cause of macro-economic disequilibria (see the Salter-Swan
model in Annex 2A), and the elimination/reduction of budget deficits represents a major
component of most adjustment programmes. In principle, a budget deficit can be reduced
either by reducing expenditures and/or increasing the government revenues. Although both
approaches are usually applied simultaneously, emphasis is generally put on the first
approach, for two reasons:

* Expenditures can be more easily, more substantially, and more rapidly reduced than tax
 receipts increased. An increase of tax revenues often requires changes in tax systems
 and tax legislation, which takes time; and taxes are often collected in arrears.

 The main objectives of structural adjustment programmes are, in broad terms, to reduce
 the role of the state in the economy and to provide incentives for increased production.
 Increased taxation to maintain existing levels of government spending are in conflict
 with both these objectives.

 Public expenditure reduction has more direct and visible effects than other adjustment
 measures, particularly in the social sphere, and has, therefore, generally received the greatest
 attention. Table 4.10 shows how the various sectors of government activities were affected
 by public expenditure cuts in 57 countries.

 The table clearly shows that defence has been the most protected sector on average and in
 most countries, while public expenditures were reduced most substantially and most
 frequently in the field of economic services.

 In subsequent sections, we focus on the following approaches to reducing budget deficits and
 their likely implications on the food security situation:

 reduction of public sector employment and wages,
 reduction of public investments,
 reduction/removal of state subsidies,
 cutting of/increase of prices for public services.


- 135-