The role of the State and consequences of alternative forms of public expenditure financing

This paper attempts to analyze the implications, for macroeconomic stability, growth and poverty reduction, and of the choices made by governments to raise revenues in order to finance public spending. The analysis is preceded by a discussion of the role of the government, and the rationale behind its attributed functions, since we believe that this configuration affects all public policy decisions made thereafter. By reviewing most recent theoretical and empirical findings, the objective of the paper is to enlighten policy makers about the choices they confront, and the consequences they should expect as a result of financing government actions, with a special emphasis on how these choices may affect those who live in poverty. Following the discussion on the role of the state, in an attempt to characterize pro-poor fiscal revenue policies, the analysis focuses on alternative policies by using two static criteria (efficiency and equity), and a dynamic dimension (growth function). This paper is divided in two parts. The first part (Section 1) analyses the need to define the role of the state and, accordingly, the goals of public policy, in response to the realities of developing countries. The second part (Sections 2 and 3) focuses essentially on the economic and social impact of financing the different functions attributed to the state, and how the different revenue sources can be best used to meet public policy goals.