Asian Development Bank Outlook 2014 'Fiscal Policy for Inclusive Growth'

Risks to the outlook have eased and are manageable. The monetary policy shift in the United States (US) may invite some volatility ahead in financial markets, albeit mitigated by accommodative monetary policy in Japan and the euro area. The regional growth outlook depends on continued recovery in the major industrial economies and on the PRC managing to contain internal credit growth smoothly.

Widening income gaps in developing Asia strengthens the case for greater use of fiscal policy to foster equality of opportunity. While the region has benefited from fiscal prudence in the past, demographic and environmental challenges are expected to compete for public resources in the coming years. To boost public expenditures on equity-enhancing programs such as education and health without undermining its fiscal sustainability, the authorities will need to explore a wide range of options for mobilizing revenue and to build equity objectives into their fiscal plans.

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Key messages

• Developing Asia’s gross domestic product (GDP) expanded steadily by 6.1 percent in 2013, the same pace as in the previous year
• The major industrial economies - the US, euro area members, and Japan - grew by a collective 1.0 percent in 2013. The momentum is expected to quicken to 1.9 percent in 2014 and 2.2 percent in 2015
• Output in the PRC grew by 7.7 percent in 2013, matching the performance of the previous year. However, growth is set to slow somewhat in the years ahead as policy promotes growth that is more equitable, sustainable, and balanced
• For resource-dependent economies, commodity price swings matter more than volatile capital flows
• Fiscal policy can help the region tackle rising inequality by fostering equality of opportunity
• Public spending on education, health care, and direct transfers can contribute to equity, but Asia underspends not only the advanced economies in these areas but also its peers in Latin America
• Strategic planning and innovative policies can contribute to more inclusive fiscal policy in Asia
• Soft global commodity prices continue to lighten pressure on consumer prices, allowing inflation to ease to 3.4 percent in developing Asia
• The region’s current account surplus has flattened, after falling continuously since its peak in 2007
• Risks to the outlook have eased, and developing Asia can manage them
• During the recent period of US quantitative easing, countries that allowed capital inflows to fuel real exchange rate appreciation and undermine their current account balances are most vulnerable to the risk of destabilizing capital outflows

This article was first published by the Asian Development Bank

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