Non-renewable commodities are playing an ever smaller role in Latin America's tax revenues

Historically, Latin America has relied heavily on raw materials, and price swings have set the pace of the region's economic cycles. However, from a fiscal point of view, its dependence on non-renewable natural resources, such as hydrocarbons and minerals, decreased notably between 2010 and 2016. This is the conclusion of the report Revenue Statistics in Latin America and the Caribbean 2018, produced by a group of international organizations.

Between 2015 and 2016, fiscal revenues in Latin American countries from natural resources in general maintained the downward trend and went from 3.5% to 2.3% of GDP. The report, published jointly by the Organization for Economic Cooperation and Development (OECD), the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), the Inter-American Center of Tax Administrations (CIAT) and the Inter-American Development Bank (IDB), also states that revenues in the state coffers from hydrocarbons in the ten oil-exporting countries fell from 5.0% to 3.4% of GDP. This reduction was due to the fall in prices, and because of a significant reduction in production. In terms of mining products, revenues remained without significant changes, at around 0.4% of GDP.

In the same period, however, tax collection as a proportion of GDP fell by just 0.3%. This data not only reflects the decline in demand and in oil prices over the last few years, but also a change in the tax structure where consumption and income taxes have an increasing weight in state coffers’ revenues.

According to the report, fiscal revenues from commodities are expected to have increased again in 2017 due to higher prices. However, according to Ángel Melguizo, Head of the OECD's Latin America and the Caribbean Unit, in an interview with Spain's El País newspaper, hydrocarbon revenues dropped to 3.3% of GDP in 2017. This shows the growing disconnect between commodities revenues and economic performance.

These results corroborate the region's progress with regard to various agencies’ recommendation of further diversification of income sources. While during the period of the commodity boom, driven mainly by Chinese demand, the sector's revenues accounted for between one third and one half of total public resources, they now account for just 10%. Against a backdrop of lower commodities prices since 2010, the fact that tax revenues have been maintained in a scenario of economic slowdown is a good sign, according to Melguizo.

Diversifying sources of tax revenue is essential for the stability of the tax system. There is still room for improvement, according to the report, for example in the area of income tax for people with higher earnings. This would help support a reduction the tax burden on business and consumption.

Jeronimo Giorgi, a Uruguayan journalist dedicated to international issues, is pursuing a master's degree in Latin American Studies. He has collaborated with various media outlets in Latin America and Europe, and has received distinctions such as the Premio Rey de España for Journalism.

Latinoamerica21 is a blog about current economic, political and social topics in Latin America that is currently published within the newspaper El Observador de Uruguay and Pagina Siete in Bolivia, and will soon be published in other media outlets within the region. The original version of this blog post is available in Spanish: Se reduce el peso de los commodities no-renovables en los ingresos tributarios de la región

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*Guest blog posts do not reflect the views of FocusEconomics. 

Date: April 9, 2018