Linkages between public sector revenues and expenditures in developing countries

Research reports and studies
June 2015
Bryn Welham, Edward Hedger and Philipp Krause

Current interest by the international development community in the connections between revenue and expenditure is driven by a focus on three areas: 

  • boosting the level of domestic revenue in low- and middle-income countries so that they can scale up their public expenditure while becoming less dependent on external finance; 
  • increasing the developmental orientation of public expenditure and more generally improving its efficiency and effectiveness; and
  • strengthening the quality of fiscal governance through greater government accountability to citizens for the use of public resources. 

This paper explores whether a better understanding of the conceptual linkages between revenue and expenditure may offer useful insights for governments and external actors targeting these objectives. It discusses three sets of technical instruments that are used regularly by governments in support of their policy objectives: fiscal rules, revenue hypothecation and tax expenditures. The paper considers the possible role for external development cooperation in domestic public finance and concludes by reflecting on the significance of this agenda.