Fiscal Consolidation, Social Sector Expenditures and Twin Deficit Hypothesis: Evidence from Emerging and Middle-Income Countries

Abstract

Following the present scale of fiscal imbalances, governments often implement fiscal consolidation programs to restore macroeconomic stability. This paper empirically explores the connections between social expenditure, current account and fiscal consolidations using the system-GMM estimator, on a panel of 23 emerging and middle-income countries for the 2009-2018 period. Our results confirm that government social expenditure decreases once fiscal austerity measures are implemented, practically when they are spending-driven. Fiscal consolidation may hurt important social expenditure allocation mainly on education and health components. Furthermore, we find that fiscal consolidation improves the current account deficit, providing support for the twin deficits hypothesis. These findings indicate that fiscal consolidation will eventually contribute to medium-and long-term external debt stability through the current account improvement. However, the exclusion of key growth determinants such as human capital can lead to many inefficiencies such as weak competition in the provision of social services (Jafarov and Gunnarsson in Government spending on health care and education in Croatia: Efficiency and reform options, working paper 136, International Monetary Fund, 2008). We suggest rationalizing social spending and devoting the country's revenue to necessary and economically productive projects. The efficient use of resources will thus ensure better quality of education and health care services. This calls for good governance, an adequate administration and effective delivery structures.

Investigating the Impact of IMF Programs on the Bank of Ghana and the Ghanaian Economy

“…1.4 Fiscal Consolidation, Twin Deficit, and Social Sector Expenditures Embark on a compelling journey into the Ghanaian landscape as we unravel the complex dynamics between fiscal consolidation, social sector expenditures, and the ever-persistent twin deficit hypothesis. Within this captivating exploration, we delve into the profound insights bestowed upon us by the esteemed scholars Lahiani et al (2022), shedding light on the remarkable interconnections, trade-offs, and implications of fiscal consolidation policies on social spending and the broader macroeconomic stability in Ghana. In the tapestry of Ghana's economic fabric, fiscal consolidation serves as a cornerstone, shaping the nation's financial resilience and overarching development agenda.…”

“…In the tapestry of Ghana's economic fabric, fiscal consolidation serves as a cornerstone, shaping the nation's financial resilience and overarching development agenda. As we navigate through this labyrinth of economic intricacies, the seminal research conducted by Lahiani et al (2022) emerges as a beacon, illuminating the path to comprehending the potential consequences and potential trade-offs of implementing fiscal consolidation policies. Through their insightful work, Lahiani et al (2022) provide us with an invaluable vantage point, revealing the profound implications that fiscal consolidation policies hold for social sector expenditures in Ghana.…”

“…As we navigate through this labyrinth of economic intricacies, the seminal research conducted by Lahiani et al (2022) emerges as a beacon, illuminating the path to comprehending the potential consequences and potential trade-offs of implementing fiscal consolidation policies. Through their insightful work, Lahiani et al (2022) provide us with an invaluable vantage point, revealing the profound implications that fiscal consolidation policies hold for social sector expenditures in Ghana. With fiscal consolidation measures aiming to bring about fiscal discipline and long-term sustainability, it becomes imperative to grasp their impact on the social fabric of the nation.…”

“…This holistic perspective empowers policymakers and researchers alike to make informed choices, carefully weighing the potential consequences and optimizing Ghana's economic stability. As we embrace the knowledge imparted by Lahiani et al (2022), we bear witness to the transformational potential of informed decision-making. Armed with this wealth of insights, Ghana can forge a path towards sustainable fiscal consolidation that nurtures the social sector and ensures macroeconomic stability.…”

Impact of fiscal consolidation on economic growth: the Tunisian case

“…In this context, the belief in the expansionary fiscal austerity has often opposite effects and requires investigating more in detail the public expenditure composition effect. For instance, as Lahiani et al (2022) highlight, the exclusion of key growth determinants, e.g. human capital can lead to many inefficiencies such as weak competition in the provision of social services.…”