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The Public Finances and
the Pacto Fiscal: Comments
Adrienne Cheasty
Senior Advisor, Fiscal Affairs Department
International Monetary Fund
CEPAL 20th Regional Seminar on Fiscal Policy
Santiago de Chile
January 28-31, 2008
t
The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its managemen
Thank you, CEPAL
• Latin America is in better fiscal shape than
considered possible 20 years ago
• Some of the credit must go to CEPAL, and to
this seminar, for its success in:
– raising awareness of fiscal issues
– becoming a focal point for policymakers and
academics to develop their thinking on them
– influencing fiscal strategies by clear-minded
thematic agendas and publications
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However, the Agenda of the
Fiscal Pact remains valid
• Consolidate the ongoing fiscal adjustment
• Raise the productivity of public
spending
• Make fiscal activities more transparent
• Promote equity
• Support the development of democratic
institutions
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Consolidate the ongoing fiscal
adjustment (1)
• The good fiscal performance may not be robust
to an unfavorable international environment
• More than half the variation in Latin American
GDP can be explained by external shocks
(Osterholm and Zettelmeyer, 2007)
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Although there is a positive
output gap....
Latin America: Cyclical Position
(In percent) 1/
10
10
Output gap
8
Output growth
8
6
Potential output growth
6
4
4
2
2
0
0
-2
-2
-4
-4
1970
1975
1980
1985
1990
1995
2000
2005
Sources: WEO; and IMF staff calculations.
1/ Potential output levels calculated as an average of all filtered
series.
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Downside risk is increasing
for the region
Growth Prospects for Latin America
and the Caribbean
(In percent)
7.0
6.0
5.0
4.0
Baseline
forecast
3.0
2.0
90 percent range
50 percent range
1.0
0.0
2003
2004
2005
2006
2007
2008
Sources: WEO; and IMF staff calculations.
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...And recent fiscal gains are
tailing off, ...
Total Revenues and Primary Spending
(In percent of GDP) 1/
29
28
Revenues
27
26
25
Primary surplus
24
23
Primary spending
22
2002
2003
2004
2005
2006
2007
Source: IMF staff estimates.
1/ Unweighted averages for 17 countries.
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... mainly because spending continues
to grow rapidly
Growth in Real Primary Expenditures
(In percent) 1/
14
Latin America
South
America &
Mexico
12
10
Central
America
8
6
4
2
0
-2
-4
2000
2001
2002
2003
2004
2005
2006
2007
Source: IMF staff estimates.
1/ Unweighted averages.
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Consolidate the ongoing fiscal
adjustment (2)
• Some aspects of the fiscal environment will be
different in the coming 20 years.
– Easier access to market financing
– Redemption from original sin?
– More capital flows
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New: easier access to market
financing
• More fiscal discipline, or less?
• The less the financing constraint, the greater the
possibility for counter-cyclical fiscal policy
• Fiscal multipliers may be different
• Crowding out via the interest rate channel is reduced as
capital mobility increases
• Switching from captive sources of financing may mean
domestic interest rates become more sensitive to fiscal policy
• Trade openness reduces fiscal multipliers (but not by much)
• Households with better access to credit may become more
Ricardian—offsetting a fiscal contraction by increasing
borrowing
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A shift towards domestic debt—
because of improvements in terms...
Figure 10. Domestic and External Public Debt in Emerging Markets
(Average across 28 emerging markets, in percent of GDP)
50
External
45
Domestic
40
35
30
25
20
15
10
5
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
Source: World Bank Global Development Finance.
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... and redemption from
original sin
Figure 11. Share of Domestic-Currency Debt Held by Nonresidents
(In percent)
30
June 2002
June 2006
25
20
15
10
5
0
Hungary
Poland
Zambia
Indonesia
Mexico
Malaysia
Brazil
Korea
Kenya
Source: World Bank Global Development Indicators.
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... imply improved debt composition
and less risk, so debt tolerance has
increased
But:
• Need to maintain a balance between local and
foreign currency debt, to reduce temptation to
inflate away local debt—and to establish
borrowing benchmarks
• Ensure government borrowing from the banking
system does not lead to inefficiencies and
delayed development of domestic capital
markets
• Will original sin return if global credit tightens?
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New: more capital flows
• Fiscal tightening is not always appropriate
– As a response to inflows when the external current
account is in surplus
– As a response to outflows with non-fiscal causes and
consequences
• But it very often is appropriate
– Need to ‘pre-position’ fiscal policy, to give it market
credibility, and the flexibility needed to confront the
new sources of volatility associated with financial
globalization
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Raise productivity of public
spending
Pre-positioning largely means savings on the
spending side, as revenue is decelerating along
with growth
– Key pending fiscal reform: tackle budget
rigidities/revenue earmarking
– To close the infrastructure gap, make public
investment more efficient rather than cutting it
• Remove unintended constraints on high-return
investment by well-run public enterprises
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Raise productivity of public
spending (example)
• Remove unintended constraints on highreturn investment by well-run public
enterprises
• Criteria for permitting low-risk public enterprises to
be excluded from fiscal targets (managerial
independence, governance, financial sustainability,
etc.)
• The criteria create a roadmap for public enterprise
reform and reduction of an important category of
fiscal risk
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Make fiscal activities more
transparent
• Emphasis on transparency is a key innovation of
the last two decades ... But still a frontier
– Standards and codes (mainstreaming ROSCs/EITI)
– Comprehensive oversight and monitoring
•
•
•
•
Public enterprises
Public-private partnerships
Guarantees
Other contingent liabilities
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Promote equity
• Fewer gains here, and more at stake
– CEPAL’s tax project
– Must fiscal termites win?
• An effective PIT
• Better compliance
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Develop democratic
institutions
• Fiscal advances: transparency, FRLs – not
enough to be democratic, but also need to be
responsible.
• We have learned how to make FRLs better
–
–
–
–
–
–
Transparency and accountability
Broad coverage
Procedural rules are more durable than numerical
If the rule has to be numerical, follow best-practice
Effective enforcement mechanisms
Integration with public finance legislation
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