Deficits, debt, sustainable development and the government machinery

21 May 2024

Most governments these days are experiencing heavy doses of fiscal stress due to the ongoing multiple crises. In these circumstances it would be nice for them to have recourse to financial reserves accumulated during better times. Unfortunately, for most governments this is not an option as they did not accrue any reserves to speak of.

Whether implementing national development plans or the Sustainable Development Goals (SDGs), responding to crises or pursuing grandiose investment projects, financial needs are almost always greater than the available resources. Developing countries tend to feel the pressure even more given the urgency to provide at least basic public goods and services to eradicate poverty and hunger in line with SDGs 1 and 2. It is no surprise then that budget deficits and debt are on the rise – amplifying the risk of failing to address basic needs even further.

In fact, according to the Financing for Sustainable Development Report 2024, fiscal deficits in both advanced economies and emerging market and developing economies stood at about 4 percent of GDP in 2023 deteriorating over the last 20 years, especially during the global financial crisis and the COVID-19 pandemic. Gross debt accounted for 110 per cent of GDP in advanced economies, 65 per cent in emerging market and developing economies, and below 60 per cent in South-Saharan Africa. The rebound of public debt was the strongest in vulnerable countries, particularly least developed countries and other low-income countries. At the same time, interest payments exceeded 10 per cent of revenue in more than 50 developing countries to the detriment of SDG implementation.

According to Juraj Nemec (In times of multiple crises, keep your eye on public money, 2024), cutting back public expenditures and increasing efficiency in budget execution are the well-known first policy responses to fiscal stress. More rigorous medium- and long-term financial planning is typically the other solution offered. Even among developed economies, however, gross debt has increased further, and buffers have not been established.

The 2024 Financing for Sustainable Development report provides valuable insights into potential reforms of financing policy areas with the help of a range of instruments and institutions to exit from dire financial situations - beyond expenditure cuts and greater efficiency. For example, domestic resource mobilization, especially in terms of additional tax revenues, was pursued rather successfully until 2008. However, large unmet tax potential still prevails in developing countries. In 2020, tax revenues were less than 15 per cent of GDP in developing countries compared to around 23 per cent in developed countries. Reducing fossil fuel subsidies - estimated at around US $7 trillion globally in 2022- could be another sizable source of additional revenues. In addition, international tax cooperation holds the promise of collecting and distributing taxes more fairly.

The report notes that in view of the challenges of debt distress faced by developing countries, the promise of the Addis Ababa Action Agenda remains largely unfulfilled. In addition to mobilizing and scaling up international finance, three priority actions are identified for consideration by the Fourth International Conference on Financing for Development in June 2025: strengthening debt crisis prevention; finding tailor-made solutions for countries with severe fiscal constraints, debt overhangs and insufficient reforms to address underlying problems to enable them to invest in the SDGs; and a more effective debt crisis resolution mechanism.

Whichever set of policies of domestic resource mobilization, budgeting and debt management or kind of international cooperation governments ultimately would prefer to pursue or may have access to, strong public institutions, in line with SDG 16, are a central requirement for success. The 11 principles of effective governance for sustainable development, developed by the Committee of Experts on Public Administration (CEPA) and endorsed by ECOSOC, provide highly relevant guidance for a comprehensive approach, including regarding sound public financial management. The principles are: competence, sound policymaking, collaboration, integrity, transparency, independent oversight, leaving no one behind, non-discrimination, participation, subsidiarity, and intergenerational equity. They can prevent silo- and crisis-driven financing solutions and greatly contribute to policy coherence to further foster achievement of the SDGs.

In institutional terms, the way forward implies fully integrating finance and budgeting functions into the policymaking process, from prioritization of objectives to budget allocations, execution, monitoring and evaluation. It also includes building the capacities of the public sector workforce, including in areas related to designing fair tax systems, effectively collecting taxes, managing expenditure, or managing debt - all of which are increasingly based on advanced technologies. Making sure that cooperation with international financial actors, in line with SDG 17, adequately meets the national challenges requires yet another set of competencies related to presentation, negotiation and contracting. Bringing all stakeholders, including public employees, citizens, the academia, civil society and the private sector, to the table will allow for informed policymaking based on existing needs and expectations. It will also raise the understanding and acceptance of difficult decisions regarding priorities and the choice of instruments.

Looking ahead to 2025, further investments are required to improve the performance of the government machinery from the political leadership to public administration across all levels of government. This can reinforce the view that the public sector is a credible, competent and integer agent of public interest, while instilling trust in government by citizens, private sector actors and the international community. Ultimately, this will also be an additional driver for greater access to finance. CEPA is well placed to support these efforts, including by continuing to make recommendations to improve governance and public administration structures and processes for sustainable development.

By Rolf Alter, Member of the Committee of Experts on Public Administration and Senior Fellow, Hertie School of Governance