Counter-cyclical fiscal policy in Vietnam: theory, evidence and policy recommendation

Abstract

A sound fiscal policy could determine long-term development of a country. Developing countries normally pursue pro-cyclical fiscal policy while advanced ones have better conditions to adapt a more counter-cyclical one. In practice, a developing country may still succeed in implementing a counter-cyclical policy, and a pro-cyclical policy could result in a major failure even if it is executed by a developed country. Real situation in Vietnam uncovers that the country has not identified a clear fiscal stance in the last 30 years; although government expenditure seems to be expansionary most of the time, and budget deficit high is even in good time period. Structural problems of the economy have recently emerged, manifested in slowing economic growth, inflation volatility. It is potentially largely due to lack of a consistent fiscal policy. Implication is drawn that Vietnam should institutionalize a counter-cyclical fiscal policy.