WHAT IS Fiscal Effort

Fiscal effort refers to the amount of revenue collected by a government. This revenue generally comes from taxes. It is often shown as a percentage of fiscal capacity. Fiscal capacity describes the amount of revenue that a government could potentially collect and is defined by things such as the state’s level of industrial development, its population and its natural resources. The relationship between the two numbers provides an estimate of the total amount the government could collect in revenue.

Fiscal effort can be measured for a country, state or municipality. As such, it may vary greatly from state to state within a country. For example, in the United States in 2012, the average amount of revenue that states collected per capita was $6,483. However, that year, the state of Idaho collected $4,750 and Alaska collected $19,200 per capita. These numbers vary based on each state’s income tax, property tax, sales tax, and any revenue generated through corporate taxes.

BREAKING DOWN Fiscal Effort

Fiscal effort is a prime determinant of how much money a government can spend on operations and services for the population. For example, tax dollars may go to fund schools, roads, military operations and the daily operations of the government itself.

In order to increase revenue, a government can create new taxes or raise existing ones. For example, in the U.S., some municipalities have created a small tax on sugared beverages, such as soft drinks. Retail customers pay a few extra cents in tax when they buy a soft drink at a store. The city then then uses this money to supplement public programs, such as schools. Alternatively, a municipality may charge a corporation to operate within its domain, such as with severance taxes placed on natural gas companies.

Fiscal Effort in International News

In 2018, the International Monetary Fund (IMF) issued a fiscal monitor report titled “Capitalizing on Good Times.” This report focused on the state of India’s economy in the wake of recent demonetization. The paper articulated the need for greater fiscal effort through fiscal adjustment, stating that, "In India…a full and smooth implementation of the new goods and services tax (GST) is necessary to avoid tax revenue underperformance resulting in cuts to capital expenditures." In this case, the institution of a broad GST would increase government revenue. In this same report, the IMF noted the appropriateness of developing economies focusing on consolidation as a primary tool of fiscal policy.

In 2005, the IMF published a paper on factors driving fiscal effort in emerging economies. The paper found that fiscal effort rose when a developing economy grew “above its potential”, engaged in an IMF-supported program or, for oil exporting countries when there was a positive shock to oil prices.