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Good News On Latin America and the Caribbean

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By Daniela Estrada | IDN-InDepth NewsAnalysis

SANTIAGO DE CHILE (IDN) – Latin American and Caribbean countries registered an average global deficit of 2.4% of Gross Domestic Product (GDP) in 2013, but their fiscal revenues rose and kept their public debt situation stable, giving them more room to increase investment and social spending, according to a new study by the UN Economic Commission for Latin American and the Caribbean (ECLAC).

In its Fiscal Panorama of Latin America and the Caribbean 2014 (Spanish only), the organization contends that while public spending increased significantly in the last two decades region-wide-especially on education and health-institutional reforms must be expanded upon to improve the quality and transparency of spending since both are key to achieving a fiscal pact that promotes greater economic growth with equality.

The document was presented during the first session of the XXVI Regional Seminar on Fiscal Policy, which was inaugurated on January 20, 2014 by the Executive Secretary of the Economic Commission for Latin America and the Caribbean (ECLAC), Alicia Bárcena.

"Forging fiscal pacts that promote equality is essential for a sustainable future," Bárcena said. "These pacts must be firmly rooted in broad social agreements and their goals must be clear: to increase tax flows and make them progressive, reduce evasion, and capture more income from natural resources," Bárcena said.

According to the Fiscal Panorama 2014, Latin America's public debt was close to an average 31% of GDP in 2013, with external and domestic debt being nearly equal. A significant decline in interest payments was also registered in the last few years.

But the situation is different in Caribbean countries, where public debt is much higher, with an average that surpassed 76% of GDP in 2013.

Meanwhile, ECLAC said, the region's fiscal income as a whole had increased by 0.7% of GDP in 2013.

But the region's fiscal position is mixed and efforts to consolidate it must be intensified in those countries with financing difficulties, the report said. It added that in addition to ensuring economic solvency, fiscal policies must also contemplate available income distribution, medium-term growth and sustainable development.

The study shows that although environmental criteria have been incorporated into recent tax reforms, challenges persist, such as devising clear and transparent policies to subsidize fuels and including redistributive considerations in the design of "green" taxes.

In redistributive matters, the Fiscal Panorama shows the limited impact of fiscal policy on taxation systems, since the progressive effect of income taxes tends to be small and is offset by the regressive impact of the value-added tax (VAT).

On transfers, ECLAC's report says that they have a strong effect in countries where pension system coverage is significant, especially in Argentina and Uruguay, and a moderate impact in the rest of the region.

Good news, according to the document, is that increased social spending has been important in the recent improvements of the Gini coefficient-which measures income distribution-at a regional level. It was developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper "Variability and Mutability" (Italian: Variabilità e mutabilità).

Rise in tax revenues

Another report tabled during the XXVI Regional Seminar on Fiscal Policy said that tax revenues in several Latin American countries were rising and those from non-renewable natural resources continued to be very important as a percentage of total incomes of States, comprising more than 30% of the total in Bolivia, Ecuador, Mexico and Venezuela, says a new report.

Describing the trends driving revenues from non-renewable natural resources across the region, the report titled Revenue Statistics in Latin America 1990-2012 (third edition) points out that "increased global demand for commodities, especially in large emerging markets, has led to sharp price increases and greater fiscal revenues associated with non-renewable natural resources".

This implies both a greater benefit from the revenues they generate as well as a higher level of risk due to the dynamics of the global market, adds the report.

"While these revenues increased at a faster rate than other government revenues before the crisis, their performance has been roughly three times more volatile than overall tax-to-GDP growth since 2000," finds the report.

The report, produced jointly by the Inter-American Centre of Tax Administrations (CIAT), the Economic Commission for Latin America and the Caribbean (ECLAC), the Organisation for Economic Co-operation and Development (OECD) and the OECD Development Centre, was launched on January 20, 2014.

It further pointed out that tax revenues in Latin American countries continue to rise but are lower as a proportion of their national incomes than in most OECD countries. The publication Revenue Statistics in Latin America shows that the average tax revenue to GDP ratio in the 18 Latin American and Caribbean countries covered by the report increased steadily from 18.9% in 2009 to 20.7% in 2012 after falling from a high point of 19.5% in 2008.

It finds that the tax to GDP ratio rose significantly across Latin American and the Caribbean over the past two decades – from 13.9% of GDP in 1990 to 20.7% of GDP in 2012. But the tax to GDP ratio is still 14 percentage points below the OECD average of 34.6%.

Wide national variations exist across Latin American countries. At the upper end are Argentina (37.3%) and Brazil (36.3%), which are both above the OECD average, while at the lower end are Guatemala (12.3%) and Dominican Republic (13.5%). The corresponding range in OECD countries was from 48% in Denmark to 19.6% in Mexico.

The share of tax revenues collected by local governments in Latin America is small in most countries and has not increased, reflecting the relatively narrow range of taxes under their jurisdictions compared with OECD countries.

Main findings of the report are:

In 2012, the tax to GDP ratio rose in 13 of the 18 countries covered, fell in 4 (Chile, Guatemala, Mexico and Uruguay), and remained unchanged in one (Costa Rica).

The difference between the OECD average tax to GDP ratio and that for the 18 countries covered is currently around 14 percentage points, compared with 19 percentage points in 1990.

The largest increases in tax to GDP ratios in 2012 were in Argentina (2.6 percentage points), Ecuador (2.3 points) and Bolivia (1.8 points).

The largest falls in 2012 were in Uruguay (1.0 percentage point) and Chile (0.4 points)

Over the 2007-2012 period, 11 countries recorded increases, the largest being in Argentina (8 percentage points), Ecuador (7 points) and Paraguay (4 points). There were declines in the other 7 countries, the largest being in Venezuela and the Dominican Republic (3 percentage points). [IDN-InDepthNews – February 2, 2014]

2014 IDN-InDepthNews | Analysis That Matters

Photo: ECLAC's Alicia Bárcena | Credit: World Economic Forum - Photo by Bel Pedrosa

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