Taxes or cutbacks? Latin America's challenge of sustaining spending without causing debt to skyrocket
This year’s economic outlook for Latin America and the Caribbean is optimistic. However, in 2015 and 2016, the region experienced a deep economic recession, which was felt across all of the countries in the region, although it affected Brazil, Argentina and Venezuela in particular. Against this backdrop, how was it possible for the region to sustain the social advances it had achieved in the decades before the recession?
*Guest blog post from Latinoamerica21.
The expansive fiscal policies of Latin American governments after the 2008 global financial crisis were not truly countercyclical, rather they were maintained even as the economy kicked back into gear. "This, then, led to a period of growing deficits, which has now forced several countries to pursue pro-cyclical contractions," says Andrew Powell, author of the report Routes to Growth in a New Trade World, coordinated by the Inter-American Development Bank (IDB).
The great challenge for Latin American countries in these circumstances is to make adjustments without impacting growth. This means that countries with high tax rates should focus on cutting costs without disrupting public investment, while countries with low tax rates should focus on increasing revenue, according to the report. Within this framework, there have been several positive developments along these lines in the last year. However, in some cases this has not been enough to stop the upward trend in public debt.
Over the past two years, the average primary fiscal balance in the region deteriorated from a deficit of 2.4% of GDP in 2015 to 2.6% in 2016, and the debt-to-GDP ratio increased slightly to reach 51%. These figures, however, conceal the diversity of these different countries, as the primary balance during those years strengthened in 8 countries, while weakening in 8 others, and holding stable in the remaining 11 countries.
The report explains that this is due to the fact that several countries embarked on a period of procyclical adjustments to keep debt from rising further. This adjustment may have been risky because of the effects it could have on both GDP and fiscal balances, "thereby rendering the adjustment effort counter-productive." However, the strategies have been prudent and fiscal consolidation has improved markedly compared to 2016. While some countries relaxed their fiscal position and pursued a countercyclical policy, others adopted a more restrictive fiscal position, while a third group maintained virtually neutral fiscal policies.
While Latin American governments worked hard to achieve a primary fiscal balance last year (the fiscal deficit minus interest payments on debt), it still came close to 0.8% of GDP due to a 0.6% decrease in public sector revenues. For this year, however, revenues are expected to increase by 0.2% of GDP, and expenditure will fall by 0.4%, so the primary deficit would be only 0.2% of GDP. If these estimates are met, debt will continue to increase throughout 2017 as it has since 2011.
Beyond this data, the countries of Latin America and the Caribbean continue to have low tax revenues, according to the Economic Commission for Latin America and the Caribbean (CEPAL) report, Tax Sustainability and Tax Reform in Latin America. In fact, this represents only 21% of GDP, unlike in developed countries where this figure exceeds 30% of GDP.
Within this framework, some 15 countries in the region have medium-term fiscal consolidation plans—approaches deemed reasonable to avoid short-term shocks—with which they are expected to increase their fiscal revenues and reduce expenses considerably. In fact, in recent years, countries such as Mexico, Chile, Colombia and Uruguay have adopted structural tax reforms in order to increase income, improve equity, reduce distortions, promote savings and investment, and simplify tax obligations. However in addition to this progress, the region still has a lot to do to improve fiscal institutions in order to address current fiscal consolidation needs.
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 will soon be published in other media outlets within the region. The original version of this blog post is available in Spanish: ¿Impuestos o recortes? El desafío de mantener el gasto sin que se dispare la deuda
*Guest blog posts do not reflect the views of FocusEconomics.
5-year economic forecasts on 30+ economic indicators for 127 countries & 33 commodities.
Learn More about Mobile in Latin America
- What is the future of telecommunications in Latin America?
- Latin America Is Home to a Robust Mobile Market
Date: August 10, 2017
TagsTrade Precious Metals Commodities Company News Inflation Russia Tunisia Greece oil prices Sub-Saharan Africa Major Economies IMF Gold Brazil Base Metals Commodities Colombia Japan Portugal precious metals Turkey Africa Iran European Union Ukraine Germany MENA Vietnam Brexit Housing Market NAFTA Eastern Europe Industrial Metals Commodities Oil Asia Latin America Euro Area NAFTA G7 Emerging Markets France Australia Argentina UK India Exchange Rate Italy Fed Energy Commodities Spain Agricultural Commodities USA Forex Infographic Consensus Forecast South Africa Banking Sector OPEC China Latin America Panelists Mexico Commodities Economic Growth (GDP) Nordic Economies Euro Area United Kingdom Venezuela Investment Unemployment rate Canada
Will Egypt’s economic recovery continue into 2018 or fall flat? Our team of analysts weighs in: https://t.co/DyNJa3s1jR
38 seconds ago
30 minutes ago
1 hour ago
2 hours ago
19 hours ago
- Increasing poverty in Latin America takes a breather thanks to improving economic dynamics
- What will be the most miserable economies in 2018?
- The World's Top 10 Largest Economies
- Is Spain doing enough to address its high youth unemployment rate?
- Has Latin America gone far enough in reducing barriers to international trade?
- Commodities Outlook: Oil, Natural Gas, Coal, Lead & Tin
- 21 experts tell us what the future looks like for cryptocurrencies and blockchain
- Turkish lira plummets to all-time low on Erdogan’s monetary feud and tense U.S.-Turkey relations
- Copper: The first metal mastered by man
- The Mercosur-EU Free Trade Agreement: Obstacles & Opportunities
- Nigerian Economy Still Treading Water Thanks to Oil Sector
- Elections in Chile: What the results could mean for the economy
- QE’s Untold Story: A Chart That Fed Correspondents Need To Investigate
- Holland’s fragile one-seat majority government targets economic growth at the expense of fiscal sustainability
- South Africa: Economy at a tipping point?
- Latin American Commodities: What’s behind the increase in demand and prices?
- Is the UK really "shackled to a corpse"?
- Spain-Catalonia: 7 economic experts weigh in on how the situation will affect the outlook
- How well is Spain's labor market doing since the crisis?
- Which countries will have the highest and lowest inflation in 2017?
- How vulnerable is Latin America to economic crises today?
- Iron ore facts and common questions answered
- The bulging economic costs of obesity
- How much investment is needed to salvage Latin America’s crumbling infrastructure?
- A Look at the Potential Impact of Brexit on the Dutch Economy
- Emerging Markets Are Kicking Into Higher Gear In 2017
- Why is foreign direct investment in Latin America falling again?
- Are Central Banks Nationalising the Economy?
- Bounty or burden? The impact of refugees on European economies is far from clear
- What’s the future of U.S.-Latin America trade relations?
- Taxes or cutbacks? Latin America's challenge of sustaining spending without causing debt to skyrocket
- Are uranium prices making a comeback?
- Taxing the Economy: Achieving a Delicate Balance
- How will Latin America’s upcoming lengthy election cycle affect the reform agenda and credit ratings?
- How will emerging market economies perform in 2017?
- Chilean Economy in Focus: Interview with Senior Economist of the Chamber of Commerce of Santiago
- CEOs Rank Top Economies for Growth Opportunities
- The Mobile Ecosystem & Latin America's Economy
- Prospects and Challenges for the Global Economy: Interview with Tim Cooper from BMI Research
- How will the Fed reduce its balance sheet & and how will the ECB end QE? - 19 economic experts weigh in
- Thoughts on "unwinding" QE from Frances Coppola
- Gold: The Most Precious of Metals (Part 3)
- The Fed and ECB at a crossroads: Unwinding QE
- Spain: The economy that continues to silence the critics
- Latin America: The Most Unequal Region in the World
- The History of OPEC: Has it been a Success?
- FocusEconomics Announces 2017 Analyst Forecast Awards Winners
- Latin America’s rising unemployment bucks nearly decade long trend
- Escape from the Central Bank Trap by Daniel Lacalle
- China's economic rebalancing act: What to look out for in 2017
- Driving Growth in Latin America: Challenges & Priorities
- Is the Global Economy Rebalancing?
- Commodity exporters face challenging times
- Recent Global Events Facilitate Mercosur-Pacific Alliance
- 23 economic experts weigh in: Why is productivity growth so low?
- Mexico's outlook as Trump nears 100-day mark
- Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election
- The anxiety of the small saver in a world of negative interest rates
- Brexit negotiations. Between Uncertainty and Urgency
- An Economic History of the EU from El Blog Salmón
- Baby Boomin': Implications of high population growth in Latin America
- Survey of International Economists Predicts a Le Pen Defeat in French Elections, Says Macron has Best Economic Plan
- Spain in a global context: developed economy with some challenges
- How much is crime costing Latin America?
- Predictions & Estimates from Economist Daniel Lacalle
- What economy will the new Dutch government inherit?
- “The data is not a true reflection of reality in India” Interview with Société Générale India Economist
- 2017 & 2018 Economic Outlook for the Top Oil Producing Countries
- What are the prospects for Emerging Economies in 2017?
- What to expect in Asia for 2017
- Top Economics & Finance Blogs of 2017
- Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook
- 4 Key European Elections That Will Impact the Economy in 2017
- How are security concerns and political chaos affecting Turkey’s economy?
- Global growth to edge up in 2017
- Set to breach targets again? Debt and deficit outlooks for Southern European Eurozone countries in 2016 & 2017
- What does Donald Trump mean for the U.S. economy?
- How will emerging markets perform in 2017?
- The economic impact of a break in U.S.-Philippines ties
- Trump election: Base metals surge due to infrastructure plan
- 5 updates on the Venezuelan economic crisis
- Canada: When your neighbor’s house is on fire…
- Short-term pain before long-term gain? A look at French labor reform and economic growth
- Asia: Unremarkable growth & unfulfilled promises?
- How India's latest monsoon is affecting the economy
- Russian economy update in wake of OPEC deal announcement
- Innovation in Latin America: Potential Goes Untapped Due to Weak Economic Conditions
- The Wisdom of the Crowds and the Consensus Forecast
- Can the peso predict the U.S. election results?
- There's no end in sight to the Venezuela crisis
- A Look at the European Union Political Calendar
- Survey of international economists shows uncertainty surrounding elections damaging U.S. growth prospects
- FocusEconomics partners with leading online statistics provider Statista
- China: Recent postive economic data may be papering over the cracks
- Sub-Saharan Africa's 2016 & 2017 growth rates
- The Italian Dilemma: Weak banks pose risk to already faltering domestic demand
- How much money do migrants from Latin America send home?
- The U.S.' (Not So) Mysterious Case of the Missing Men
- What to expect from the G20 economies by 2020
- The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit