Presumably, the emphasis on expenditure switching and reducing policies under these adjustment programs, in spite of their relatively high economic and social costs, reflects the hypothesized oneto-one correspondence between economic growth and macroeconomic stability—reduction of fiscal deficits, low inflation and exchange rate volatility [IMF (1987), Ambler and Paquet (1996)]. However, over time, the deficit reduction objectives of these programs became a suitable indicator for overall economic growth and macroeconomic performance [Stiglitz (2002), Krugman (2009)].

In theory, this apparent one-to-one correspondence is in line with standard neoclassical models, which conjecture that taxation and government spending have no impact on output growth [Cochrane (2009)]. Hence, if government programs funded by deficit spending are expected to exacerbate inflation and undermine macroeconomic stability and growth—particularly by crowding out private investments,—drastic cuts in government expenditures should increase efficiency in the allocation of resources and ultimately contribute to output expansion and growth, conversely.

However, empirical evidences in advanced and developing countries alike have not always supported the theory underlying these neoclassical models. For instance, in a study based on the US economy, Fu et al. (2003) find the deficit to be an unreliable measure of growth and overall economic performance. Similarly, an empirical study investigating the link between fiscal policy and growth in a cross-section analysis involving a large number of developing countries fails to reach conclusive recommendations on the direction and stability of the association between fiscal adjustment and economic growth [Easterly and Rebelo (1993)].

In fact, fiscal deficits can be either expansionary or contractionary, depending on the nature of programs financed under the government budget. An increase in budget deficits financed by tax cuts may be expansionary if it results in increases physical capital accumulation. Hence, governments in advanced, and more recently in emerging market economies, have consistently used the budget as an automatic stabilizer—running large fiscal deficits (spending increases and/or tax cuts) as counter-cyclical policy measures to avert downturns and continuously expand output and demands [Chang (2008), Stiglitz (2010)].<sup>7</sup> In this regard, the proliferation of large fiscal stimulus packages in the aftermath of the 2008 global economic and financial crisis is in line with this counter-cyclical approach to policymaking [Spilimbergo et al. (2008), IMF (2009a)].<sup>8</sup> Interestingly enough, the increase in government deficit to boost demands and mitigate the risks of economic downturns and enhance growth in these countries has also been accompanied by a monetary policy of extreme laxity—speedy recourse to quantitative easing and downward adjustments of interest rates which have fallen to historically low levels [Blanchard et al. (2010)].

These latest developments and steps taken by advanced economies in response to the global downturn provide an opportunity to revisit the fiscal adjustment and growth nexus in Sub-Saharan Africa to inform future policy-making in the region. The speed and scale of the response, reflected

> 7 China announced a stimulus worth US$586 billion (1.2% of GDP) to boost domestic demand later in 2008. 8 Making the case for fiscal stimulus in response to the global economic downturn, the IMF established a number of criteria for a successful recovery. In particular, it is stressed that the optimum fiscal package should be timely, large, lasting, diversified, contingent, collective and sustainable. For further details, see Spilimbergo et al. (2008).

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