DIIS Reports / Danish Institute for International Studies 2009:08
Careful consideration of the appropriate level and composition of aggregate public spending is vital in low income countries, especially in the presence of large volumes of foreign aid. Not only can expansion of the public sector weaken economic growth, but also provision of public services may be difficult to retrench. These issues are relevant to Mozambique as the share of government in GDP already is comparatively high and strategic management of aggregate public spending historically has been weak. A new long-term macroeconomic model quantifies the implications of alternative aggregate spending profiles. It shows that small increases in minimum levels of government spending correspond to large increases in the duration to aid independence. Sharp reductions in aid availability would necessitate significant fiscal and economic adjustments, including cuts in real public spending per capita. For this reason, there is no room for complacency as regards the future of development finance to Mozambique.