Are Latin American governments maximising the potential of fiscal policy as a development tool? This 2009 edition of the annual OECD Latin American Economic Outlook analyses the progress governments in the region have achieved in the fiscal realm during the last decade. It concludes that they could do much more to exploit the ability of fiscal policy to boost economic growth and combat poverty and inequality. In the current context of global financial turmoil, the relevance of fiscal management is more important than ever. This is essential reading for those who want to know more about fiscal policy in Latin America, its impact on development and the challenges that lie ahead.
The link between fiscal policy and development
Latin American governments have not neglected fiscal policy as a macroeconomic stabiliser, but taxation, public spending and public debt management can also be deployed to reduce poverty and inequality. Transparent and progressive tax systems and high-quality public goods and services are signs of a healthy social contract and consequently assets for democratic legitimacy. The potential of fiscal policy to promote development and consolidate this democratic legitimacy is still substantially unrealised in the region.
Recent trends in Latin America’s fiscal performance
Since the end of the debt crisis of the 1980s, Latin American governments have reduced deficits, lowered fiscal volatility, increased public expenditure and pioneered fiscal innovations. However, important problems remain: revenue generation relies on volatile non-tax sources and regressive indirect taxes, while public spending and social transfers play a very limited distributive role. The performance gap with OECD countries is still high.
Public debt, political cycles and capital markets
Latin American political cycles affect sovereign bond markets as investors worry about the effect of elections on debt management: investors fear an increase in public spending by incumbent politicians as well as the economic policies platforms of populist candidates. Although recent democratic consolidation and the development of domestic bond markets have eased the effect of politics on capital markets, sounder public debt management and information flows around elections remain a challenge.
Tax revenues in Latin America
Fiscal revenues have increased in Latin America during the last decade, though countriesâ€™ experiences vary within the region and most governments still strive to improve tax collection. In particular, too little revenue comes from personal income taxes and too much from regressive indirect taxes, which explains in part why tax systems do so little to reduce inequality. This pattern of public revenues is in large part the consequence of low average incomes and an unequal income distribution.
Fiscal policy and informality in Latin America
Informality is an important and persisting feature of Latin American economies. Informal workers are not all simply tax evaders: many are poor workers, excluded from formal labour markets and deprived of economic rights. Enforcement is essential, but simplified regimes that align the costs of formality with its benefits, together with the provision of social services to formal and informal workers on a more equal footing, can help Latin American fiscal systems to deal better with informality.
Public spending and the quality of education
Social spending is rising in Latin America, but the region still needs to improve the quantity and quality of publicly provided goods and services. More money matters, but how that money is spent matters as much or even more. The OECD experience in areas where public spending contributes to development, such as education, shows that there is not necessarily a trade-off between performance quality and equity. Nevertheless, the policies that matter most for student learning are often under-emphasised in Latin America.
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