Download Financial Programming Model

Fiscal Space for Investment in
Infrastructure in Colombia
Rodrigo Suescún
The World Bank
January 2005
Fiscal Space for Investment in
Infrastructure in Colombia
• Motivation
• Main Features of the Model
• The Model
• Simulation Results
• Creating Fiscal Space
Fiscal Space for Investment in
Infrastructure in Colombia
Motivation:
• In many countries productive public
investment has been compressed in the
process of fiscal adjustment
• Public investment contraction may entail
a growth cost – unless offset by private
initiative, which has not been generally the
case
• This trend is not apparent in Colombia
Latin America: Public Investment in Infrastructure
(weighted average of 7 countries, percent of GDP)
4.0
3.5
3.0
2.5
% 2.0
1.5
1.0
0.5
Total
Roads plus Rails
Note: 7 Latin America countries, ARG, BOL, BRA, CHL, COL, MEX, PER.
Power
Water
Telecommunications
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0.0
Latin America: Investment in Infrastructure (public + private)
(weighted average of 7 countries, percent of GDP)
4.0
3.5
3.0
2.5
% 2.0
1.5
1.0
0.5
Total
Roads plus Rails
Note: 7 Latin Am erica countries, ARG, BOL, BRA, CHL, COL, MEX, PER.
Power
Water
Telecommunications
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0.0
Fiscal Space for Investment in
Infrastructure in Colombia
Motivation:
• Evaluation of Macroeconomic
Policies in Colombia:
Financial Programming Model
Fiscal Space for Investment in
Infrastructure in Colombia
Motivation:
Financial Programming Model
• Growth rate is exogenous, independent of
policies
• Timing of policies is irrelevant
• Expectations play no role
• No foward looking behavior
• No purposeful behavior
Fiscal Space for Investment in
Infrastructure in Colombia
Motivation:
Financial Programming Model
• Focus on fiscal deficit and gross debt
targets: distinction between current and
capital spending is irrelevant
• Bias against public capital formation
• Static framework vs asset-creating nature
and intertemporal trade-offs involved in
public investment decisions:
Fiscal Space for Investment in
Infrastructure in Colombia
Motivation:
Concerns
• Already high public debt (54% of GDP in 2003)
• Actual fiscal position
(Overall budget deficit in 2003: 3.1% of GDP in
consolidated)
• Future unfunded state pension deficit
Risk
• Fiscal adjusment using capital spending
(inflexible budget)
Fiscal Space for Investment in
Infrastructure in Colombia
General Objective:
• Construct a dynamic general equilibrium
model to study economic behavior under
alternative fiscal policies
• Two forces explain off-steady state dynamics
1) Fiscal polices (perfect foresight)
2) Current policies and economy off their steady
state sustainable balanced growth path
Main Features of the Model
•
•
•
•
Small open economy
Two goods: home & foreign goods
Agents: household, firms and government sector
Central gov: current and capital spending, taxes on
labor and capital income and consumption and
domestic debt
• Rest of gov: operates infrastructure, current and
capital spending and budget surplus target to
improve combined public sector finances
• Upward-sloping supply of funds
Model
• Three reproducible factors: infrastructure
capital, business capital and human capital
• Infrastructure capital
S t   { (S )
s
s
p
t

s
 (1 -  )(S )
s
g
t

s
s
p
p
Spt = (1 - δs )Spt -1 + Ihs
Ψ
(
S
,
S
t
t
t -1 )
rg
Sgt = (1 - δs )Sgt -1 + Icg
+
I
t
t

}
1
s
Model
• Business Capital
m
k
K t = (1 - δ k )K t -1 + I(I hk
,
I
)
Ψ
(K t , K t -1 )
t
t
m
i
i
hk  
i
m 
I kt  I(I hk
,
I
)


{

(
I
)

(
1

)(
I
}
t
t
t
t )
i
• Human capital
H t = (1 - δ h )H t -1 + χYt
i

1
i
Model
• Production Function
Yt  y (K t -1 )  (S t -1 )  ( N t H t -1 ) 1--
• Firm’s problem: standard
Model
• Household’s Problem
Preferences



t 0  u(c t , l t )  t 0  log(c t )   (1  l t ) 




t

c t   (c )
h
t

t
m 
t
 (1  )(c )


1

Model
• Household’s Problem
Budget constraint
dt  [B t - (1  rt )B t -1 ]  (1  rt )dt 1  pt (cth  ithk  iths )  ctm  itm  M tm  tt  Ot
 ( pt  pt ) X t  pt ( wt nt H t 1  rt kt 1  tp stp1 )  TRt
Model
• Household’s Problem
t t   ct (p t c ht  c mt )   wtw p t w t n t H t 1   kt p t {(rt   k )k t 1  ( pt   s )s pt 1 }
1  lt  n t
m
k
k t  (1 -  k )k t -1  i(i hk
,
i
)

(k t , k t -1 )
t
t
s
p
p
s pt  (1 -  s )s pt -1  i hs

(
s
,
s
t
t
t -1 )
Model
• Government

cg
cg
cg
cg
cg
Bcg

(
1

r
)
B

p
(
G

I
)

T

O

TR
t
t
t 1
t
t
t
t
t
t
Btrg  (1  rt ) Btrg1  pt (Gtrg  I trg )  tg Stg1  Otrg  TRtrg
Model
• Resource Constraints
hs
g
Yt  Yt  w t N t H t 1  rt K t 1   pt S pt 1   gt Sgt 1  C ht  (I hk
t  It )  Gt  It  Xt
Dt  (1  rt ) Dt 1  Ctm  I tm  M tm  pt X t   d [ Dt 1 ]
• Upward-sloping supply of resources
cg
rg


B

B


t
t

rt  r  exp   
Yt


Table 1
Calibrated Parameter Values
Parameter
Description

share parameter in CES consumption function

parameter determining elasticity of substitution between consumption goods
i

share parameter in CES investment function


i

i

k
s
r 



s

s
h

s
y
Value
0.8826
-0.2200
parameter determining elasticity of substitution between investment goods
weighting parameter for the disutility of working time
parameter determining intertemporal elasticity of substitution in labor supply
scale parameter in CES investment function
subjective discount factor
rate of depreciation of business capital stock
rate of depreciation of infrastructure capital stock
foreign borrowing rate
semi-elasticity sovereign yield spread to government debt to output ratio
capital share parameter in the production function
infrastructure capital share in the production function
0.3369
-0.2200
5.9713
1.6000
1.8680
0.9410
0.0353
0.0400
0.0400
1.3000
0.2331
0.1408
share parameter in CES infrastructure capital aggregator function
coefficient determining elasticity of substitution between public and private infrastructure
rate of depreciation of human capital stock
knowledge acquisition rate
infrastructure capital aggregator scaling parameter
production function scaling parameter
0.4784
3.0000
0.0400
0.0006
1.9995
32.5102
Tax revenue
Nontax revenue
Total revenue
Current expenditure
Infrastructure investment
Primary expenditures
Table 2
Benchmark Fiscal Policy Stance (2003)
Central Government
(% of GDP)
14.1
Tax rates
1.5
Consumption
15.6
Corporate income
Personal income
16.0
0.6
16.6
(%)
12.0
26.3
0.9
(% of GDP)
Primary surplus
Interest payments (approx)
Overall budget surplus
-1.0
Debt
4.4
Central government gross debt
-5.5
Rest of Public Sector
(% of GDP)
Return on infrastructure capital
7.1
Other revenue (adjustment factor)
5.4
Total revenue
12.6
Expenditures (contribution to GDP)
Infrastructure investment
Primary expenditures
54.0
8.0
2.2
10.2
(% of GDP)
Primary surplus
Net Interest payments
Overall budget surplus
Primary surplus
Interest payments (approx)
Overall budget surplus
2.4
Debt
0.0
Rest of government net debt
2.4
Consolidated Public Sector
(% of GDP)
1.4
Debt
4.4
Public sector net debt
-3.1
0.0
(% of GDP)
54.0
Figure 1
Benchmark Fiscal Policy Stance
Central government spending
(share of GDP)
Rest of government
investment in infrastructure
(share of GDP)
2028
2025
2022
2019
2016
2013
2010
2004
2030
2028
2026
2024
2022
2020
2018
2016
2014
0.0%
2012
15%
2010
0.5%
2008
16%
2006
1.0%
2004
17%
2007
Central government
investment in infrastructure
(share of GDP)
Consumption tax rate
2026
2028
2024
2026
2030
2024
2022
2022
2020
2018
2016
2012
2014
2030
2028
2020
2018
2016
2014
2012
2010
2008
2030
2028
2026
2024
2022
2020
2018
2016
2014
0.0%
2012
25%
2010
1.0%
2008
26%
2006
2.0%
2004
27%
2006
Labor income tax rate
2004
Capital income tax rate
2010
2008
2004
2030
2028
2026
2024
2022
2020
2018
2016
2014
2012
2010
11%
2008
1%
2006
12%
2004
2%
2006
13%
3%
Figure 2A
Benchmark Economy Transition Path: Macroeconomic Aggregates
Macroeconomic aggregates
(share of GDP)
Private investment in infrastructure
(share of GDP)
80%
60%
40%
20%
0%
4%
2012
2013
2014
2012
2013
2014
2012
2013
2014
2011
2011
2010
2009
2008
2007
2006
2005
2004
2014
2013
2012
2%
2011
Consumption
2011
2010
2009
2008
2007
2006
2005
2004
3%
Investment
Private investment in business sector
(share of GDP)
Trade balance
(share of GDP)
2010
2009
2008
2007
2006
9%
2005
0.0%
2004
10%
-1.0%
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
8%
-2.0%
External debt
(share of GDP)
GDP growth rate
100%
4.0%
80%
3.5%
60%
2010
2009
2008
2007
2006
2005
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2004
3.0%
40%
Figure 2B
Benchmark Economy Transition Path: Fiscal Position
Central government accounts
(share of GDP)
Central government gross debt
(share of GDP)
2014
2010
2009
2008
2007
2006
2005
2004
140%
120%
100%
80%
60%
40%
2014
2013
2012
2011
2014
2013
2012
2011
2010
2007
2014
Public sector net debt
(share of GDP)
2009
2006
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
0%
2013
1%
2005
-1%
-3%
-5%
-7%
-9%
-11%
-13%
-15%
2012
2%
2004
Consolidated public sector
overall budget surplus
(share of GDP)
2011
Consolidated public sector
primary surplus
(share of GDP)
2010
Overall budget surplus
2008
Primary Surplus
2009
40%
2008
-30%
2007
90%
2004
-20%
2006
140%
2005
2013
2012
2011
2010
2009
2008
2007
2006
2005
-10%
2004
0%
Figure 3
Future State Social Security Deficits
(% of GDP)
7.0
6.0
5.0
4.0
3.0
2.0
1.0
Sources:
From 2004-2050: Departamento Nacional de Planeación
From 2051-onward: Extrapolation
2100
2094
2088
2082
2076
2070
2064
2058
2052
2046
2040
2034
2028
2022
2016
2010
2004
0.0
Figure 4A
Transition Path under the Adjusted Fiscal Policy Stance: Macroeconomic Aggregates
Growth rate
Long-run growth rate
Benchmark
2034
2032
2030
2028
2026
2024
2022
2020
Benchmark
Investment
(share of GDP)
Consumption
(share of GDP)
63%
61%
59%
57%
13%
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
3%
2004
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
8%
Benchmark
Benchmark
Private investment in infrastructure
(share of GDP)
Private investment in business sector
(share of GDP)
4.0%
3.0%
2.0%
1.0%
0.0%
2011
2012
2013
2014
2011
2012
2013
2014
2010
2009
2008
2007
2006
2005
2004
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
9%
7%
5%
3%
1%
Benchmark
Benchmark
External debt
(share of GDP)
Trade balance
(share of GDP)
Benchmark
2010
2009
2008
2007
2006
2005
2004
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
100%
80%
60%
40%
2004
6.0%
4.0%
2.0%
0.0%
-2.0%
2018
2016
2014
2012
2010
2008
2006
2004
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
4.2%
4.0%
3.8%
3.6%
3.4%
3.2%
3.0%
2004
4.2%
4.0%
3.8%
3.6%
3.4%
3.2%
3.0%
Benchmark
Figure 4B
Transition Path under the Adjusted Fiscal Policy Stance: Fiscal Position
Tax revenue
(share of GDP)
Central government
primary surplus
(share of GDP)
15%
14%
13%
12%
11%
10%
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
0%
-2%
-4%
-6%
Benchmark
Benchmark
Central government
overall budget surplus
(share of GDP)
Central government gross debt
(share of GDP)
340%
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
240%
2004
0%
140%
2012
2013
2014
2013
2014
2014
2013
2012
2011
2010
2009
140%
90%
Benchmark
Benchmark
2011
2010
2009
2008
2007
2004
-40%
2006
40%
-30%
2005
2008
2007
2006
2005
2004
2011
Public sector net debt
(share of GDP)
0%
-20%
2010
Benchmark
Consolidated public sector
overall budget surplus
(share of GDP)
-10%
2012
Benchmark
2009
2008
2007
2004
-60%
2006
40%
-40%
2005
-20%
Figure 5A
Official Multiyear Economic Program 2004-2020
Growth rate
5%
65
4%
64
Final household consumption
(% of GDP)
63
3%
62
Investment
(% of GDP)
Government expenditure
(% of GDP)
22
2020
2018
2016
2014
2012
2020
2018
2016
Public sector net debt
(% of GDP)
56
20
2014
2020
2018
2016
2014
2012
2010
2008
2006
2004
18.5
2008
19.5
2006
20.5
2004
18
17
16
15
14
13
12
21.5
2012
Private investment
(% of GDP)
2010
22.5
2010
2008
2006
61
2004
2020
2018
2016
2014
2012
2010
2008
2006
2004
2%
52
18
Source: Ministerio de Hacienda y Crédito Público (2004)
2014
2012
2010
2008
2006
2004
2002
2020
2018
2016
2014
2012
2010
40
2008
12
2006
44
2004
14
2000
48
16
Figure 5B
IMF Baseline Projection: Colombia 2004-2010
Growth rate
5%
4%
3%
2010
Investment
(% of GDP)
2010
2009
2004
2008
7
2010
14
2009
8
2008
15
2007
9
2006
10
16
2005
11
17
2004
18
2005
12
2007
19
Private investment
(% of GDP)
2006
2009
2008
2007
2006
2005
2004
2%
Public sector net debt
(% of GDP)
60
55
50
45
Source: IMF (2004b)
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
40
Figure 6A
Economy with No Public Spending in Infrastructure: Macroeconomic Aggregates
Growth rate
Long-run growth rate
2020
2018
2016
2014
New Benchmark
New Benchmark
Consumption
(share of GDP)
Investment
(share of GDP)
65%
63%
61%
59%
57%
15%
10%
2013
2014
2013
2014
2013
2014
2012
2012
2012
2011
2010
2009
2008
2007
2006
2005
2004
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
5%
New Benchmark
New Benchmark
Private investment in infrastructure
(share of GDP)
Private investment in business sector
(share of GDP)
4.0%
3.0%
2.0%
1.0%
0.0%
2011
2010
2009
2008
2007
2006
2005
2004
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
9%
7%
5%
3%
1%
New Benchmark
New Benchmark
External debt
(share of GDP)
Trade balance
(share of GDP)
New Benchmark
2011
2010
2009
2008
2007
2006
2005
2004
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
120%
100%
80%
60%
40%
2004
6.0%
4.0%
2.0%
0.0%
-2.0%
2012
2010
2008
2006
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2004
4.2%
4.0%
3.8%
3.6%
3.4%
3.2%
3.0%
4.2%
4.0%
3.8%
3.6%
3.4%
3.2%
3.0%
New Benchmark
Figure 6B
Economy with No Public Spending in Infrastructure: Fiscal Position
Tax revenue
(share of GDP)
Central government
primary surplus
(share of GDP)
15%
14%
13%
12%
11%
10%
2014
2013
2012
2011
2014
2013
2012
2013
2014
2013
2014
2011
2012
2014
2013
Public sector net debt
(share of GDP)
2012
2011
2010
2009
140%
90%
New Benchmark
2011
2010
2009
2008
2007
-14%
2006
2004
40%
2005
2008
2007
2006
2005
2010
New Benchmark
Consolidated public sector
overall budget surplus
(share of GDP)
-9%
2012
New Benchmark
2009
2007
-60%
2006
2004
340%
240%
140%
40%
2005
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
-40%
2004
2011
Central government gross debt
(share of GDP)
0%
-4%
2010
New Benchmark
Central government
overall budget surplus
(share of GDP)
2004
2009
-6%
New Benchmark
-20%
2008
2007
2006
2005
-4%
2008
2010
2009
2008
2007
2006
2005
2004
-2%
2004
0%
New Benchmark
Figure 7
Other Features of the Economy with No Public Investment
User cost of public infrastructure capital
2030
2032
2034
2030
2032
2034
2028
2026
2024
2022
2020
2018
2016
2014
2012
2010
2008
2006
2004
34%
30%
26%
22%
18%
14%
10%
New Benchmark
New Benchmark
2028
2026
2024
2022
2020
2018
2016
2014
2012
2010
2008
2006
6%
4%
2%
0%
-2%
-4%
-6%
-8%
2004
Combined public sector primary surplus
(share of GDP)
Creating Fiscal space
• Golden rule
• Permanent balance rule
• Redefinition of the public sector
Table 3
Main Public Enterprises with Investment in Infrastructure, 2003
(% of GDP)
Public Enterprise
Overall Surplus
Total Debt
ISA
0.09
0.61
ISAGEN
0.08
0.20
CORELCA
0.02
0.11
URRA
0.13
0.72
CENTRALES ELECTRICAS DE NARIÑO
-0.01
0.00
ELECTRIFICADORA DEL META
0.00
na
ELECTRIFICADORA DE SANTANDER
0.00
0.01
ELECTRIFICADORA DEL HUILA
0.00
0.00
ECOGAS
0.06
na
ECOPETROL
0.55
0.16
TELECOM
-0.07
0.10
EPM
0.00
0.92
EMCALI
0.17
0.39
ETB
-0.15
0.09
EAAB
0.05
0.42
ADPOSTAL
na
na
INDUMIL
na
na
SATENA
na
0.05
Total
Source: CONFIS
na: not available
0.93
3.78