Effective fiscal policy depends on the amount of budget resources available to raise spending or lower taxes without jeopardizing fiscal sustainability. This resource availability is often called fiscal space. Since the global financial crisis, fiscal space in emerging market and developing economies has narrowed. This makes these economies more vulnerable to sudden spikes in financing costs and limits their ability to counteract adverse shocks.

(Also available in World Bank Development Digest, Issue 6, pages 53-58, April 2019)