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CHAPTER OUTLINE
I. Many writers have suggested that the recent global economic downturn did
not affect developing countries as severely as it did developed countries.
But the truth is that developing countries were not insulated from the global
II. This updated chapter identi es and explains scal policy. Overall scal
policy involves government intervention in the economy— which often acts
by raising or lowering expenditures or raising or lowering individual and
corporate taxes. The chapter does not dwell on the global economic down-
turn but closely examines the purpose of scal policy.
III. The next section examines categories of government expenditures. Here
the distinction is drawn between capital (public) investment and recurrent
expenditures. Governments need to nd a way to pay for many essentials,
Fiscal Policy
CHAPTER 11
Fiscal Policy | 75
generate the funds needed for all expenses or how it can cut operating
expenses.
IV. Are there many opportunities for poor countries to increase public saving
by restraining expenditure? Spending on ser vices and nondurable goods
usually accounts for half of all recurrent expenditures. In most countries,
maintenance of roads and other infrastructure is chronically underfunded.
V. If it is dif cult to compress expenditures, perhaps governments can aug-
ment public saving by increasing revenues. The obvious policy of imposing
VI. Taxes also affect the incentives for private saving. In this regard,
consumption- based taxes generally are considered more favorable than
VII. The scal system also has a major in uence on the distribution of income.
On the tax side, the personal income tax falls mainly on the top 20 percent
VIII. Policies to assist the poor often are much more effective on the expenditure
