Ezequiel Cabezon, Patrizia Tumbarello, and Yiqun Wu
INTERNATIONAL MONETARY FUND
Reflecting diseconomies of scale in providing public goods and services, recurrent
spending in small states typically represents a large share of GDP. For some small states,
this limits the fiscal space available for growth-promoting capital spending. Small states
generally face greater revenue volatility than other country groups, owing to their
exposure to exogenous shocks (including natural disasters) and narrow production bases.
With limited buffers, revenue volatility often results in procyclical fiscal policy as the
econometric analysis shows. To strengthen fiscal frameworks, small states should seek to
streamline and prioritize recurrent spending to create fiscal space for capital spending. The
quality of spending could also be improved through public financial management reform
and multiyear budgeting.