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Sustainable Fiscal Policies for Stronger Social Contracts

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Shifting wealth increases the availability of resources in many converging countries, creating a window of opportunity to foster social cohesion. Fast economic growth and structural change are producing more development finance flows in converging countries where tax revenues have outpaced those of other developing countries. However, for opportunities to materialise, converging economies must take determined steps to create a stable source of financing by increasing fiscal legitimacy. The current situation in many converging economies is characterised by the state's low legitimacy as an honest broker between different interest groups, limiting public sector effectiveness in delivering essential services for reducing inequalities and fostering social cohesion. Public policies to increase social cohesion require stable financing and time to mature. Fiscal policies and institutions that loosen the link between current levels of revenue and expenditure ‐ e.g. rainy‐day funds that save a share of windfall revenues to maintain social expenditures during bad times ‐ are effective tools for dealing with this challenge. Financing inter‐generational redistribution like social pensions out of such funds can foster social cohesion and create a constituency for stable fiscal policy.
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Document Type: Review Article

Publication date: 2011-11-01

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