Research Notes: Fiscal Cyclicality in Brunei Darussalam

This paper examines the conduct of fiscal policy in Brunei from 2003Q1 to 2014Q2, focusing on the cyclical patterns in government expenditure. The results from a structural vector autoregression model provide evidence that fiscal policy in Brunei is procyclical, which has an expansionary effect on output and thus exacerbates the business cycle. This behaviour is primarily driven by procyclical current expenditure while capital expenditure is largely acyclical. The government should exercise caution to avoid adding cyclical pressures to the economy already afflicted by volatile oil prices. A key policy recommendation would be to adopt clear fiscal rules and better integration of the reserve funds in the budgetary framework to delink government spending from volatile oil revenues.