A country’s fiscal balance is the difference between government revenues and expenditures. A fiscal deficit occurs when, in a given year, a government spends more than it receives in revenues. When fiscal deficits occur recurrently, the shortages are offset with debt accumulation. Over time, growing debt levels increase the burden of capital and interest payments and could send negative signals to international financial markets, affecting the sustainability of public finances. A complementary indicator of a country’s fiscal situation is the primary balance: the difference between the fiscal balance and the primary balance reflects the relative weight of interest payments within government accounts.

Recording transitory factors, such as shocks to commodities prices, variations in housing prices or one-off transactions (e.g. privatisation), affects a country’s fiscal balance; this could give a distorted picture of its underlying fiscal position. Analysing indicators that are not influenced by temporary fluctuations helps policy makers identify the underlying trend of fiscal policies associated with long-term public finance sustainability. The structural fiscal balance aims to capture these trends in order to assess fiscal performance.

Debt is incurred when governments spend more than they receive. Debt represents governments’ outstanding liabilities resulting from the need to finance deficits by borrowing. While debt is not negative per se, high levels could threaten the sustainability of public finances, sending negative signals to lenders and private investors. The size of public debt can be influenced by factors such as the exchange rate (e.g. depending on the currency in which the debt is issued) and interest rate fluctuations.

Governments raise revenues to finance the provision of goods and services, pay accruing debt and interests, and fulfil their redistributive role within and across generations. The amount raised is determined by multiple factors, such as government policies, political institutions, the endowment of natural resources, stage of economic and social development, and internal and external macroeconomic conditions. When revenue flow fluctuates substantially, governments need to manage shortages or surpluses to ensure consistent service provision over time. Revenue shortages may require raising taxes, contracting debt or consolidating expenditures; surpluses may result in further expenditure (e.g. more public investment or current consumption), constituting reserve funds or reducing taxes.

The capacity to tax citizens is one of government’s core attributes. Revenues collected from taxes represent the most important source of public funds in almost all countries and are crucial to provide public goods and services, guarantee government operations, undertake public investments and, depending on societal choices, embark on a higher or lower degree of income redistribution. As a general trend, in 2015 tax revenues as a share of GDP are around 14% on average in the four SEA countries for which there is data. This is significantly less than in the four OECD countries in the region, where tax revenues range between 25% and 33% of GDP.

Governments spend money to provide goods and services, redistribute income and pursue economic development objectives. The amount of financial resources that governments spend provides an indication of the public sector’s size, although this does not necessarily reflect its performance. Though government expenditures are usually less elastic than government revenues, they are also sensitive to economic developments associated with macroeconomic conditions and the business cycle. They also reflect past and current political decisions.

The composition of government expenditures by transaction gives an indication of policy priorities, such as the type of service delivery model (e.g. a focus on direct provision or on outsourcing) and the size of financial commitments resulting from public debt.

Government investment creates public infrastructure essential for long-term economic growth and societal well-being. For instance, public investment supports the provision of public services (e.g. schools). Further, governments invest in transport infrastructure, and other large-scale projects to improve productivity and competitiveness. Finally, governments can also invest in research and development to promote new technologies or products, such as artificial intelligence, machine learning and 3D printing.