THE ROLE OF FINANCIAL RISKS IN ASSESSING AND OPTIMIZING THE IMPACT OF GOVERNMENT SPENDING ON ECONOMIC GROWTH

Abstract

Annotation: This thesis examines, from a theoretical perspective, how financial 
risks  shape  the  assessment  and  optimization  of  government  spending's  effect  on 
economic growth in developing countries. It argues that while public expenditure on 
infrastructure,  health,  and  education  can  raise  both  short-run demand  and  long-run 
productive capacity, three financial risks debt sustainability, inflation, and contingent 
liabilities substantially condition the size and direction of fiscal multipliers. High and 
growing public debt narrows fiscal space, raises borrowing costs, and can reduce or 
reverse  the  growth  impact  of  additional  spending.  Inflation,  whether  driven  by 
monetary financing or capacity constraints, erodes the real value and effectiveness of 
public investment and raises uncertainty for private investors. Contingent liabilities 
(guarantees, bailouts, PPP commitments) represent hidden fiscal exposures that can 
abruptly raise public debt and crowd out development spending. The thesis synthesizes 
theoretical  frameworks  (Keynesian  demand  management  and  endogenous  growth 
models) with institutional guidance from the IMF and World Bank (Debt Sustainability 
Framework and fiscal-risk best practices), and concludes that optimizing fiscal policy 
in  developing  economies  requires  careful  composition  of  spending,  medium-term 
fiscal frameworks, explicit fiscal risk management, and strong institutions to preserve 
both growth and macro-financial stability.