Fiscal holes and black holes threaten MDGs

A just published report for Oxfam by Development Finance International, The Impact of the Global Financial Crisis on the Budgets of Low-Income Countries, examines the impact of the global financial crisis on the budgets of low-income countries, especially their spending to reach the Millennium Development Goals (MDG). The crisis created a huge budget revenue hole of $65bn, of which aid has filled only one-third. As a result, after some fiscal stimulus to combat the crisis in 2009, most Low income Countries (LIC) (including those with IMF programs) are cutting MDG spending, especially on education and social protection. They have also had to borrow expensive domestic loans, and increase anti-poor sales taxes. Almost all LICs could absorb much more aid without negative economic consequences (whereas they have much less space to borrow or to raise taxes).

The report therefore urges the international community to make strong new aid commitments at the Millennium Summit in September 2010, funded by financial transaction taxes or other innovative financing:

* the IMF to encourage LICs to spend more on MDG goals and on combating climate change and to report regularly on such spending;
* and LIC governments to increase spending on social protection and education; taxation of income; property and foreign investors; and efforts to fight tax avoidance.

The authors of the report, Katerina Kyrili and Matthew Martin from Development Finance International warn: “If these changes are not made, the fiscal hole caused by the crisis risks becoming a ‘black hole’ into which the MDGs, and the lives and education of many of the world’s poorest citizens, will disappear.“