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April 15, 2019

Putting the ‘Public’ Back into Public Finance

Plant
Posted by Paolo de Renzio[1]

Few people ever stop to think about it, but government budgets affect our everyday lives in many different ways. Budget decisions – how a government taxes, borrows and spends – can have a deep impact on economic performance, income distribution and service delivery.

Budgeting, Aaron Wildavsky once famously said, is about “translating financial resources into human purposes”[2]. How those purposes are defined then becomes a very important question, one that can determine whether fiscal policies work for everyone’s benefit or perpetuate existing inequities.

For a good part of the past 50 years, fiscal policies have been mostly focused on keeping deficits low and promoting economic growth. The underlying narrative is simple enough: governments should avoid accumulating excessive debt and encourage private sector investment by keeping taxes low. Ensuing economic growth will then “trickle down” and improve everyone’s well-being.

Fiscal discipline and economic growth are of course important, but they do not necessarily lead to better lives for all, and cannot be considered as the sole ends of fiscal policy. In fact, this model may have contributed to the malaise that many societies face today, including soaring income inequality, declining trust in government, and failures to address persistent poverty and climate change, challenges that threaten humanity as a whole.

What is therefore urgently needed is an alternative framework that works better for everyone. Elements of a different narrative have already started to emerge, for example through civil society campaigns on fighting inequality, promoting tax justice or targeting public resources to the realization of economic and social rights. The IMF has recently echoed these concerns and stepped up its work on inequality, highlighting how it can “erode social cohesion, lead to political polarization, and ultimately lower economic growth”[3].

How can we develop a more comprehensive approach to public finance that works for all, ensuring that fiscal policies help avoid both extreme poverty and extreme riches, protect and promote people’s rights, and safeguard the natural environment for present and future generations? As a starting point, we need to redefine the objectives of fiscal policy. Here is my proposal:

  • Promote equity and social justice. As an expression of the social contract that binds state and citizens together, the first and most important goal of public finance is to ensure that the costs and benefits of fiscal policies are distributed fairly across the population, satisfying everyone’s needs and providing opportunities for all human beings to flourish. Pursuing this goal would imply the universal provision of basic services and a special attention to poor and vulnerable groups, for example through targeted programs and transfers. It would also imply a reduction of income inequality to acceptable levels, for example through more progressive taxation and a reduction of tax breaks and loopholes that benefit the rich.

  • Ensure long-term sustainability. Second, rather than focus exclusively on short-term fiscal adjustments, governments should aim at maximizing fiscal space over the long term. They should consider broader fiscal sustainability issues linked to demographic trends, climate change and the depletion of natural capital. Pursuing this goal would include assessing different options for increasing domestic revenues, promoting the careful management of natural resources, reducing existing debt and managing public-private partnerships responsibly. It would also imply moving beyond GDP as the main measure of an economy’s success, adopting others that incorporate environmental and social sustainability.

  • Improve government effectiveness. The third goal addresses the need to manage existing resources to maximize their development impact, transforming funding into the delivery of quality goods and services. Pursuing this goal would imply improving the management of public finances and human resources to make more effective use of public resources. It would also imply tackling the issue of corruption, which often imposes great costs on poorer citizens and impedes the achievement of better development outcomes.

  • Strengthen inclusion and accountability. The final goal supports the others, by ensuring that budget processes allow everyone, including marginalized groups, to have a voice in policy choices, either directly or through effective representative and oversight institutions. Pursuing this goal would imply drastically improving the quality and understandability of fiscal information, and the creation of innovative spaces for participation and deliberation. These would allow citizens to engage effectively in the budget process and hold governments accountable for how they manage public finances.

Many of the elements in the above framework are not necessarily new. They have been part of the agendas of various organizations for some time. But it is time to pull these parts together in a more comprehensive framework that can provide an alternative to the predominant public finance narrative. This could help shift the focus away from fiscal discipline and growth as ends in themselves, and redefine the objectives of fiscal policy in a way that puts the ‘public’ back into public finance, and ensures that government budgets work for the benefit of all.

[1] Paolo de Renzio is Senior Research Fellow with the International Budget Partnership. He can be reached at pderenzio@internationalbudget.org. This blog draws on a previous post published on IBP’s own Open Budgets blog, and on a longer paper which can be found here.

[2] A. Wildavsky (1986). Budgeting: A Comparative Theory of the Budgetary Processes. New Brunswick and Oxford: Transaction Publishers. (page 7)

[3] IMF (2017). Fiscal Monitor: Tackling Inequality. Washington DC: International Monetary Fund. (page 1)

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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