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The following excerpt summarises Chapter 1 of Challenges to Fiscal Adjustment in Latin America: The Cases of Argentina, Brazil, Chile and Mexico by Luiz de Mello and Nanno Mulder (OECD Economics Department), published on 22 February 2006.
Since the early 1990s, many countries in Latin America have made substantial progress in consolidating their public finances, but important differences remain across countries with regard to fiscal performance. Following a long period of fiscal disarray, which resulted in chronic inflation, especially during most of the 1980s, budget deficits were trimmed, reliance on inflation-tax revenue was reduced and the real value of public debt was no longer eroded by inflation. Many countries recognised contingent and off-budget liabilities as an integral part of fiscal adjustment and as a means of boosting transparency in fiscal policymaking. As a result, the fiscal policy stance has become more reactive to changes in indebtedness and some countries have worked towards making fiscal consolidation more permanent by improving public expenditure management and control, as well as upgrading budget institutions.
Notwithstanding area-wide progress in fiscal consolidation, fiscal performance has differed across countries. This chapter compares and contrasts trends and highlights stylised facts in fiscal adjustment in Latin America since the early 1990s, with particular emphasis on Argentina, Brazil, Chile and Mexico. These four countries have relatively diverse experiences with fiscal adjustment, facing some common challenges in the years to come.
The main issues highlighted in the chapter are as follows:
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There is considerable diversity in the size and scope of government among Latin American countries. Governments are typically much smaller in Latin America than in the OECD area and the composition of government expenditure and revenue varies considerably across countries.
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Public debt levels also differ significantly across countries in Latin America, being a considerable source of vulnerability in the higher-debt countries. Policy effort towards fiscal adjustment is on-going in the reforming countries, underpinning the consolidation of macroeconomic stabilisation in the region.
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In most countries in Latin America, the composition of fiscal adjustment has been tilted towards hiking revenue and compressing public investment, rather than retrenching current spending. This is likely to affect the sustainability of adjustment over time.
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The fiscal stance continues to have a bias towards pro-cyclicality in most cases, reflecting to a large extent high indebtedness and the ensuing vulnerability to external shocks in “bad” times, as well as failure to contain the rise in expenditure in “good” times on the back of cyclical, often commodity price-related, revenue windfalls.
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Budget and political institutions have a bearing on the government’s ability to deliver long-lasting fiscal adjustment, the level of indebtedness it can sustain, and the extent of counter-cyclicality it can afford.
Indebtedness and fiscal stance, 1990-2003
In per cent of GDP
Source: Secretaría de Hacienda, Argentina; Secretaria do Tesouro Nacional, Brazil; Dirección de Presupuestos, Chile; Secretaría de Hacienda y Crédito Público, Mexico.
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For further information please contact the South America Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was edited by Luiz de Mello.
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