Reduction of Government deficits has increasingly become an important issue in fiscal policy framework of developing countries because of some reasons like:
- Increased public debt which is costly to maintain – debt servicing is costly in terms of high interest rates.
- Deficit financing is a disincentive to investment – especially where there is an upward adjustment in level of taxes.
- Reduction in donor and other development partners‟ role in deficit financing support – necessitating strict budget discipline – the need for developing countries to narrow the budget deficits in line with their tax revenue base.
- Budget deficits are inflationary, especially where government spending is on aspects like salaries for civil servants, provision of relief food or subsidizing loss making public enterprises, all having no direct relationship with real output.