By Alexander Pick, Fiscal economist, OECD Development Centre
Fiscal space is big right now. It was an important part of the OECD’s policy prescriptions in last year’s Economic Outlook and was high on the World Bank President’s agenda at this year’s Spring Meetings in Washington. It also featured in discussions at the 2017 Forum on Financing for Development in May. Yet the term has a different meaning depending on whether it is applied to a developed or a developing country, and it doesn’t appear to resonate with policy makers at a national level.
So what does fiscal space mean for developed economies? The OECD and IMF view the concept in terms of long-term debt sustainability. By this approach, fiscal space is interpreted as the distance between actual debt levels and a theoretical higher level of debt that is nonetheless safe. Fiscal space suggests how much wiggle-room national governments have to increase growth-enhancing spending, such as infrastructure investment, without raising taxes. This is important in the current context of a sluggish global economy where monetary policy has done all it can to support growth and the pressure is thus on fiscal policy and structural reform to propel the recovery.