Avoiding Fiscal Crisis

Fiscal activities in the form of contingent liabilities are common in both developed and developing countries, in part because they allow governments to secure public services or economic and financial stability without immediately having to raise taxes or borrow. Yet they pose a fiscal danger as governments may underestimate or under-report their risks and possible future fiscal costs. Although they may not appear in governments’ fiscal reports in the short term, they generate government risk exposures and create fiscal obligations for the medium to long term. The accumulation of such risk exposures and obligations depends on fiscal institutions. Fiscal institutions influence government decisions towards contingent liabilities and fiscal risk, and can contribute to limiting the use and design of contingent liabilities as a form of fiscal activity.