Fiscal Policy

Policies used by governments to manage tax revenue collection and spending are crucial for development on several fronts:

Macro-Fiscal

Many low-income countries struggle to address macroeconomic instability, respond to shocks, provide adequate public goods, or invest in infrastructure to support medium-term growth. This highlights the need for better economic management.

Sound fiscal policy and fiscal sustainability are cornerstones of economic stability, supporting dependable, continuous public service delivery. Prudent fiscal management also builds resilience and buffers for shocks and creates fiscal space that sustains long-term growth and job creation.

Effective fiscal policy—through the use of discretionary spending and automatic stabilizers—helps stabilize the economy by boosting demand during downturns and cooling the demand when the economy overheats.

Taxes and Government Revenue

Developing countries often find it difficult to raise enough tax revenue to fund education, infrastructure, and essential public services.

About 74 percent of low-income countries and 48 percent of lower middle-income countries collect less than 15 percent of GDP in taxes, a level too low to fund essential services and achieve sustainable growth. In countries affected by fragility, conflict, and violence, the average tax-to-GDP ratio was less than 12 percent in 2024.

To sustain economic growth and job creation, governments must boost domestic revenue while keeping systems efficient and fair. Sound tax systems can also help attract private investment and create jobs by providing accurate price signals for market efficiency.

Public Expenditure

Globally, countries spend about 33 percent of GDP on public expenditure —the money spent by governments to provide goods and services —but low-income nations average only 20 percent. A large share of budgets goes to current spending—over 80 percent—reducing the space for pro-growth and pro-jobs investment.

Rapid population growth, security needs, natural disasters, and large losses from state-owned enterprises—combined with limited domestic revenue, declining aid, and high debt—create additional spending pressures on budgets.

To sustain growth and job creation, government must prioritize spending and ensure efficiency in service delivery. Strong budget institutions, good data, and efficient service delivery are essential for making public spending effective and long-lasting.

The World Bank is the world’s largest source of financing for domestic revenue mobilization, helping countries strengthen and modernize their tax systems. As of October 2024, active operations supporting tax-related reforms totaled $7 billion, with $3.6 billion directed to the world’s poorest countries through IDA.

We help governments not just collect more taxes but collect them better, including by broadening tax bases, curbing evasion, improving natural resource taxation, and digitalizing tax systems. These reforms aim to make tax systems more efficient, fair, and supportive of sustainable growth.

We also work with countries to make public spending more effective, transparent, and aligned with development goals. Our support focuses on improving how governments plan and manage public expenditures to get the most value from every dollar.

Key priorities include building fiscal resilience, strengthening investment planning, improving social protection systems, and boosting efficiency by reallocating funds from low-impact programs and recurrent costs to pro-growth and pro-jobs priority areas like health, education, and infrastructure. In addition, we support wage bill reforms, better procurement practices, and stronger financial management

A central tool for our engagement is Public Finance Reviews (PFRs). Through them,  we work with governments to identify gaps and offer practical policy advice. We provide recommendations on reducing budget deficits, ensuring sustainable fiscal policy across all levels of government, strenghtening fiscal sustainability, stabilizing output, and promoting inclusive growth and job creation.

We also help countries identify and manage fiscal risks—such as those stemming from natural disasters or state-owned enterprises—and design stronger institutions including fiscal rules and independent fiscal councils to build policy credibility and long-term stability.

Overall, we help countries strengthen fiscal policy, so it better supports growth and jobs, manages shocks, and reduces key risks.