Building Sector Concerns into Macroeconomic Financial Programming:
Lessons from Senegal and Uganda

December 2007

Abstract

Underinvestment in infrastructure and social sectors during much of the 1990s has ignited a lively debate on “fiscal space”—that is, whether some countries could tolerate a larger public deficit if the additional resources were invested in growth-enhancing sectors. Developing countries claim that the standard financial programming model does not appropriately respond to their needs. Its main drawback is that it mainly focuses on the short term financial cost of public investment without considering its medium term growth payoffs. In the standard model, investment is treated in the same way current expenditure is. If a fiscal adjustment is needed investments, as they are often lumpy, are easy targets for budget cuts, irrespective of their impact on future growth potential. As an alternative, some countries consider the adoption of alternative rules to assess the fiscal viability of sector allocation decisions, including taking out investment expenditure from budget deficit accounting. This paper elaborates on these ideas and offers a simple extension of the standard macroeconomic financial programming to explicitly link public spending for infrastructure, health, and education to economic growth. It also considers the relationship between capital investment and spending on operation and maintenance as well as the relevance of productivity of different forms of sector investment. We test the model for two countries in Africa—Uganda and Senegal

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