Download Poverty and Social Impact Analysis (PSIA)

PRSPs, Macroeconomic
Constraints and Fiscal Policy
Humberto Lopez (PRMPR)
Fiscal Policy: Three levels
Aggregate fiscal policy /framework


Deals with HOW MUCH WE CAN SPEND.
Budget envelope, sustainability of fiscal policy.
Efficient allocation of resources


Deals with WHERE WE SPEND.
Sectoral envelopes, policy priorities.
Operational efficiency


Deals with HOW WE SPEND.
Modalities of service delivery.
This presentation…
Deals with the First Level and covers

Why is important to have a sound fiscal
framework?
 In principle, a poverty reduction strategy that is not
embedded in a coherent macroeconomic framework will
not be credible (sustainability, resources)

What do we understand by a sound fiscal
framework?
 Beyond philosophical considerations, what is that
operational staff should be looking at?

What does a sound fiscal framework implies for
poverty reduction strategies?
 One example (Honduras) that computes the fiscal and
social envelopes available for a Poverty Reduction
Strategy.
Importance of sound fiscal policy.
Lack of fiscal discipline has been blamed for:



Crisis
LAC Debt crisis in the 1980s, HIPC Initiative, Argentina
Poor economic performance
Unambiguously, deficits are bad for private investment,
growth, and hence for poverty reduction
Increased Vulnerabilities
One of the few policy measures we know to raise national
savings (a critical element to reduce vulnerabilities) is to
increase public savings
All these elements have significant negative
effects on whole population, but especially on
the poor.
More close to the HD network
Lack of fiscal discipline leads eventually to:

Program discontinuity…
 Cancellation of programs, in many cases in the social
sectors, due to lack of funds.

Inefficiencies…
 Problems with counterpart funds, delays in
implementation schedules, etc.

And as a result, WASTE
 Sunk costs, cost-benefit changes due to longer
implementation schedules, etc.
When a fiscal framework is sustainable?
One possible definition (not unique!).

In principle, deficit must be consistent with nonexplosive debt dynamics.


Deficits should be fully financed.


Requires defining what we mean by non explosive
dynamics. For HIPC countries, the HIPC thresholds
seem a natural choice.
In developing countries, it might help assuming that
the deficit is fully financed with external concessional
resources.
There remains the problem of how to deal with the
tax level.

Depending on existing tax levels, and given the
negative impact of tax increases on growth, one has to
be careful about proposing a tax increase.
Fiscal policy 101
 Stock of foreign debt=Deficit –* Stock of foreign debt
=(+-)/(1++)
Given inflation (), GDP growth () and exchange rate ()
expectations it is possible to compute the Deficit (as a % of
GDP) the country can afford.
Deficit (% of GDP)= * Debt target (% of GDP)
One example: Honduras Debt
and Deficit consistent targets
GDP Growth
High
6%
Intermediate
5%
4%
3%
Low
2%
1%
Debt Target
(1,2)
Sustainability
Overall Deficit (1)
4.2
3.8
3.2
2.7
2.2
1.7
-10%
-20%
3.5
2.8
3.1
2.5
2.7
2.2
2.3
1.8
1.8
1.5
1.4
1.1
But we could not find resources
to finance it…
Best estimate of financing US$250
million per year against requirements of
GDP Growth
High
6%
Debt Target
Sustainability
-10%
-20%
492
439
386
Intermediate
5%
436
388
346
4%
3%
Gross disbursements
374
328
343
305
311
276
Low
2%
1%
288
267
251
253
239
225
Implications for poverty reduction
strategies
Two main ingredients:

Overall spending envelope
 Growth rate
 Tax levels, sustainable deficit levels

Allocation to social sectors within the
budget (social sectors envelope!)
 Social expenditure ratio (SER) (UNDP
recommendation 40%)
HND: Social spending Scenarios
US$ Million 2000-15
Growth
Percent
5%
4%
3%
2%
36
11,327
10,371
9,508
8,728
SER
40
12,521
11,459
10,500
9,633
44
13,714
12,547
11,492
10,539
But…
When we take into account population
growth and current per capita spending…
Growth
5%
4%
3%
2%
36
SER
40
44
901
-55
-918
-1,698
2,095
1,033
74
-792
3,289
2,121
1,066
113
Conclusions
We have to face fiscal constraints:


Consistency with the macro framework.
Consistency with financing availability.
We have to be realistic:

What is the mileage we can get from the
available resources.