ABSTRACT
This chapter takes as its starting point the overview of key issues involved in conducting prudent, growth-oriented fiscal policy provided in Hemming and Thornton (2005). The earlier paper argued that fiscal discipline, reflected in prudent fiscal balances and sustainable public debt, is needed for macro-economic stability, and long-term growth, as well as to deal with fiscal risks. However, fiscal policy in industrial and developing countries, including some Asian and Pacific countries, has often tended to lack fiscal discipline, which then compromises the above objectives. In the worst cases, persistent deficit bias culminates in disruptive debt and potentially wider financial crises. Further, fiscal indiscipline is typically associated with procyclicality, which increases economic volatility, compounds macro-economic stability and debt sustainability problems, and further undermines growth prospects. Consequently, maintaining fiscal discipline is a clear priority for development, and the first section describes what this involves.
