DEFINITION of 'Fiscal Capacity'

In economics, the ability of groups, institutions, etc. to generate revenue. The fiscal capacity of governments depends on a variety of factors including industrial capacity, natural resource wealth and personal incomes.

BREAKING DOWN 'Fiscal Capacity'

When governments develop their fiscal policy, determining fiscal capacity is an important step. Identifying fiscal capacity gives governments a good idea of the different programs and services that they will be able to provide to their citizens. It also helps governments determine the tax rate necessary to provide a certain level of programs. The theory behind fiscal capacity can also be used by other groups, such as school districts, who need to determine what they will be able to provide to their students.

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