In recent years, there has been a reassessment of the role of fiscal policy as an instrument of stabilization and driver of economic growth in the developed world. In Latin America and the Caribbean, this debate should serve to strengthen fiscal instruments that not only react automatically in an anti-cyclical sense, but also spur aggregate demand, investment and have a greater redistributive impact, according to a new report announced today by ECLAC.
In its Fiscal Panorama of Latin America and the Caribbean 2018: Public Policy Challenges in the Framework of the 2030 Agenda, ECLAC adds that the mobilization of domestic resources through a broader tax base, improved design of the tax system, strengthening of tax administration and the elimination of channels for tax avoidance and evasion, are also key tasks for improving the financing of the 2030 Agenda for Sustainable Development, approved by the United Nations in 2015, and inclusive growth in the region.
The report, which analyzes relevant fiscal trends in the region and examines the historic evolution of fiscal policy over the past three decades and its future challenges, will be officially presented on Monday, March 26 by Alicia Bárcena, Executive Secretary of the Economic Commission for Latin America and the Caribbean (ECLAC), during the first day of the XXX Regional Seminar on Fiscal Policy, to be held through March 27 at the organization’s central headquarters in Santiago, Chile.
According to the Fiscal Panorama 2018, there is also a need to reinforce social protection and personal income tax systems, since this will result in a double benefit by improving fiscal policy’s stabilization role and its redistributive impact.
The report indicates that in the majority of countries in the region, resource levels are below potential, not only due to deficiencies in tax administration and design, but also to high levels of tax evasion – reaching some USD 340 billion in 2015 in income tax and VAT alone, i.e. 6.7% of regional GDP for that year – and very generous tax expenditures.
It goes on to add that personal income tax continues to be the Achilles heel of tax systems, with average regional revenues of 1.8% of GDP in 2015, compared to 8.4% for the Organization for Economic Cooperation and Development (OECD) member countries.
“These obstacles culminate in another major regional shortcoming: the weak redistributive capacity of the tax system, whose structures are dominated by regressive indirect taxes —in a region that remains the most unequal on the planet notwithstanding progress made in this regard during the past decade,” says Alicia Bárcena in the prologue to the report.
In this regard, in 2017 primary financial results significantly improved in a number of Latin American countries, reflecting the process of fiscal consolidation across the region, according to the report. It underscores the progress recorded in South America, where the average primary deficit fell from 1.9% of GDP in 2016 to 1.5% in 2017. In northern Latin America – including Central America, Haiti, the Dominican Republic and Mexico – primary results went from a deficit of 0.2% of GDP in 2016 to a surplus in 2017, reaching 0.1% of GDP. In the Caribbean, in contrast, the primary surplus remained stable at 1.0% of GDP.
The report also points out that gross public debt across Latin America reached 38.4% of GDP in 2017, representing a slight increase of around 0.7 percentage points of GDP compared to 2016. Moreover, growth in public spending was contained, given that in 2017 an overall reduction in primary current spending was observed throughout the region, falling from 15.5% of GDP in 2016 to 15.3% in 2017 in Latin America, and from 21.9% of GDP in 2016 to 21.4% in 2017 in the Caribbean.
Meanwhile, there were signs of a reactivation of public revenues in 2017, mainly in South America, where the uptick in economic activity and the new tax measures adopted in 2016 spurred tax revenues. The evolution of public revenues for the region last year was supported, in part, by the stabilization of revenues from non-renewable natural resources, especially fossil fuels and mining products.
In tax matters, the Fiscal Panorama finds that in 2017 tax activism remained steady, with tax changes identified in at least 17 countries of the region. Several modified their taxes to strengthen fiscal income, especially in terms of: so-called corrective taxes (higher taxes on alcohol, tobacco and gambling); energy consumption (increases specifically applied to fuels or electricity consumption); foreign trade (increases in levies associated with imports).
Members of the media are invited to attend the XXX Regional Seminar on Fiscal Policy on Monday 26 and Tuesday 27 March 2018. Journalists must carry their media credentials or identity documents with them to gain entry.
More information, including the event program, is available (in Spanish) at this link.
The entire meeting will be transmitted online via YouTube.