Latin America needs better taxes and better spending

 

28/10/2008 - Fiscal policy, says the latest Latin American Economic Outlook (LEO 2009) from the OECD’s Development Centre, can be a powerful tool for economic, political and social development in Latin America if taxes are raised efficiently and fairly and spending is directed to promoting growth and reducing poverty and inequality.


Fiscal policy – taxing and spending – is part of the political process and should contribute to the consolidation of democracy, the report says.  LEO 2009 argues that taxes and public spending can directly attack poverty and inequality, twin problems that continue to beset the region.

Until now, this potential for good has not been realised in Latin America.  Current social spending is failing in its redistributive function. And the quality of basic public goods and services such as health or education neither meets the region’s development needs nor provides a spur to citizens’ engagement with the state.

Interview with Jeff Dayton-Johnson, Chief Economist for Latin America, OECD Development Centre

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Launching the report in San Salvador, OECD Secretary-General Angel Gurría recognised the recent macroeconomic achievements of Latin America but stressed the importance of re-orienting the objectives of fiscal policy towards reducing poverty and inequality in a region with some of the largest socio-economic disparities in the world.

Mr. Gurría highlighted the importance of transforming fiscal policy into a development tool in times of financial and economic uncertainty.  “Fiscal systems which do little to combat poverty and reduce inequalities weaken social support for democratic processes and institutions and fail to empower the people to make the most of globalisation.”

Key policy messages of LEO 2009 include recommendations to decouple debt management from politics, to diversify tax sources, to improve the quality of public spending and to simplify tax systems to reduce the burden of informality, one of the key economic challenges of Latin America.

On average, revenues from personal income taxes in Latin American countries amount to the equivalent of only 4% of total tax revenues, compared with approximately 25% in OECD countries. The total fiscal revenue in Latin American countries, measured in terms of the share of Gross Domestic Product (GDP), amounts to only around 23% of GDP, compared with an average in OECD countries of around 42%, while public spending, on the whole range of areas covered by the public budget from education and healthcare to transport infrastructures and defence, averages around 25%, compared with 44% in OECD countries.  (At present, Mexico is the only Latin American country that is a member of OECD, and it is included in both sets of figures. OECD has invited Chile to embark on discussions that are intended to lead to its future membership, but it is not yet a member and is not included in the OECD figures).

Such figures show that Latin America still has plenty to do in terms of fiscal reform.  Revenue generation should diversify away from its reliance on non-tax sources and indirect taxes.  And social transfers do not yet play their proper role.  Achievements and innovations in the fiscal realm need to translate into sustained policies and lasting institutional reforms.  InOECD countries, governments have been taxing more and spending more on social benefits to offset the trend towards more inequality.  In Latin America, too, governments need to do more to use tax revenues to support social priorities.

Education spending, spotlighted in LEO 2009, is but one example of how fiscal policy can foster development, not just economic growth, in Latin America, but it needs to be of much better quality. The challenge is not just to increase social spending in Latin America, says LEO 2009, but to improve the quality of that expenditure by making it more efficient and better targeted.

For more information, journalists are invited to contact Luisa Constanza on (tel.: +33 6 24 45 44 57), Angel Alonso Arroba on (tel.: +33 6 35 47 62 31), or Colm Foy, Head of Media Relations at the Development Centre, on (tel.: +33 1 45 24 84 80).

Journalists with a password can obtain the full report on Source OECD and the protected site for journalists.  Those without a password are invited to email news.contact @ oecd.org.

 

Key Policy Recommendations

  • Use fiscal policy as a development tool
    LEO 2009 suggests that social spending in Latin American has less effect on equalising income distribution – changes in income for the poor and rich – than it does in the European Union. Hence, in Latin America, social spending is not improving living standards for as much of the population as it could. Using a statistical measure, known as the Gini coefficient to measure inequality of income distribution, LEO 2009 notes the difference to be a reduction of 19 points by social spending in Europe, compared to only 2 Gini points in Latin America.

  • Improve fiscal performance
    Government revenues in Latin America averaged 23 per cent of GDP between 1990 and 2006, compared to 42 per cent in OECD countries. Public spending tells a similar story:  it averaged only 25 per cent of GDP in the region, against 44 per cent in OECD countries.

  • Decouple debt management from politics
    During 1990-2006, fiscal expenditure increased by 0.7 GDP percentage points in Latin America during election years. In contrast, the public-spending impact of elections was essentially zero in OECD countries.

  • Diversify tax revenue sources
    Only one out of three Latin Americans is subject to income taxation.

  • Simplify taxes to reduce the burden of informality
    More than half of Latin American workers are not entitled to pension rights through their jobs.

  • Improve the quality of public spending
    Education spending per pupil is still five times lower in Latin America than in OECD countries.

 

 

 

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