Managing fiscal space amidst multiple crises

Fiscal space refers to the extent to which a government can increase its spending or sustain a reduction in revenues without compromising its long-term fiscal or financial stability. In other words, it concerns the capacity of a government to implement its fiscal policy objectives while ensuring that its debt remains at a manageable level and its economy remains stable. In this sense, fiscal space is a crucial factor determining the resilience of the growth and development paths of the least developed countries (LDCs) in an increasingly complex and volatile global environment. This chapter highlights recent trends in key indicators of fiscal space, such as debt volumes and composition, as well as LDC governments’ fiscal balances, and takes stock of the ability of LDCs to meet their development finance needs at a time when they are suffering from the impacts of numerous crises worldwide. It shows that external financial flows remain a critical factor for fiscal space in LDCs, while, over the medium term, domestic resource mobilization may play a larger role in some of these countries. Despite the critical role of external finance, official development assistance (ODA) flows to LDCs are substantially lower than commitments made by developed countries. In this regard, the chapter presents and discusses recent trends in ODA flows to the LDCs, including their volume, composition and target sectors.

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