## fiscal

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---

### Introduction and overview of the shock
- The COVID-19 pandemic is "an unprecedented global synchronized shock and a public health crisis with no medical solution yet."
- The level of real GDP for 2020 in the region is expected to be "about 9 percent lower than what was forecast in early-2020."
- "A large fraction of this output loss is projected to persist in 2021" with "considerable uncertainty about the legacy effects of the crisis."

### Fiscal responses: size, composition, and immediate effects
- Announced fiscal support in LAC:
  - Average announced measures amount to "8 percent of GDP."
  - LA5 packages are "noticeably larger and more frontloaded" than during the Global Financial Crisis.
  - Composition: increased health spending and "emergency lifelines" including tax cuts and deferrals, direct transfers (including expansion of existing programs), relaxation/expansion of unemployment insurance, wage subsidies and payroll-support loans, and loan guarantees.
  - Discretion across countries reflected pandemic severity, fiscal space, and automatic stabilizer strength.
- Below-the-line and off-budget actions:
  - Loans, equity injections, asset purchases, debt assumptions, credit guarantees, and quasi-fiscal operations by state banks were widely used.
  - Usage magnitudes in 2020: heavily used in Peru, Bolivia, and Brazil (between "6.5 to 8 percent of GDP"); used to a lesser extent in Belize, Chile, Colombia, El Salvador, Honduras, and Argentina (between "2 and 3.5 percent of GDP").
  - Some measures raise government debt ratios immediately; others carry contingent fiscal risks without upfront cashflow effects.

### Impact on public debt and drivers (2020 projections)
- Public debt levels expected to "increase sharply in 2020" driven by discretionary fiscal actions, weaker activity, and automatic stabilizers.
- LA5 simple decomposition:
  - Adverse r-g developments, including exchange-rate effects on foreign-currency debt, expected to "increase debt ratios by over 12 percent of GDP in the LA5."
  - "Higher primary deficits would also add another 6 percent of GDP to debt."
  - Effect partially offset by other factors (stock-flow adjustment).

### Fiscal positions and financing vulnerabilities pre-pandemic
- Many countries entered the pandemic with "more vulnerable fiscal positions—higher fiscal deficits and public debt as percent of GDP—than before the Global Financial Crisis (GFC)."
- Revenue and expenditure context (over 2017–2019):
  - Average government revenues in the LA5 and LAC were "about 25 percent of GDP."
  - This was "3 percentage points of GDP lower than emerging market economies’ average."
  - Revenues in LAC and LA5 were "about 88 percent of expenditures," versus "more than 91 percent of expenditures in emerging market economies."
- Financing vulnerabilities:
  - "Gross financing needs coming into the crisis were generally high—exceeding 10 percent of GDP in many economies."
  - Maturing debt accounted for "over 6 percent of GDP in many countries."
  - As of 2019, "the average share of foreign-currency-denominated debt in total debt in the region exceeded   50 percent."
  - Exceptions: Brazil, Chile, Costa Rica, Mexico and Peru have shares of foreign-denominated debt "well below 50 percent."
  - Average maturity was "short in some countries, including Ecuador and Brazil," while "Uruguay and Peru" lengthened maturity profiles.
- Foreign investor participation:
  - Since 2014, participation "increased significantly in Colombia," "declined in Brazil and Mexico," and "fluctuated around high levels in Peru."
  - "Peru stands out as having a relatively high foreign investors’ participation rate."

### Transmission channels: how COVID-19 affects fiscal positions
- Slower activity and higher spending:
  - Containment measures caused a "sudden stop" in labor supply and demand declines, reducing tax bases and revenues, raising unemployment and social safety net spending.
  - Weaker activity lowered some commodity prices, "especially oil," reducing fiscal receipts in exporters.
  - Discretionary lifelines to households and firms raised government expenditures.

### Phases of the pandemic and fiscal policy priorities
- Three pandemic phases: lockdown/containment; gradual reopening under uncertainty; post-pandemic.
- Acute containment-phase priorities:
  - Protect lives and livelihoods.
  - Accommodate higher health and emergency spending.
  - Adopt timely, temporary, targeted fiscal actions to protect households and firms, including informal sectors.
- Guidance: Because of fiscal costs, measures should be "transparently embedded in medium-term fiscal frameworks ('do whatever it takes but make sure to keep the receipts')."

### Discretionary measures: instrument-level actions (above-the-line)
- Typical measures by instrument and country examples:
  - Increased health spending (all countries).
  - Wage subsidies/complements (all LA5).
  - Expanded social safety nets (Brazil, Chile, Colombia, Peru).
  - Enhanced unemployment benefits (Chile, Colombia).
  - Public investment programs (Peru).
  - Revenue-side business support: suspension of CIT payments (Chile, Colombia); temporary elimination of financial transaction tax (Brazil); elimination of road tolls; temporary VAT and tariff eliminations (Colombia).
- Implementation: Most household transfers are being implemented (notably in LA5), while some investment and health spending faced delays.

### Fiscal multipliers, modeling approach, and headline simulation results
- Modeling approach:
  - WHDMOD module used to quantify announced above-the-line measures’ effects on real GDP and government debt, starting from January 2020 WEO projections.
  - Distinction among instruments: government consumption; targeted transfers; general transfers; government investment; consumption taxes/VAT; corporate income taxes; labor taxes (including PIT) and social security contributions; property taxes.
  - Multipliers applied: expenditure multipliers ordered (general transfers smallest, investment largest); revenue-side: consumption, labor, and property taxes have higher impact than CIT.
  - Simulations use purely fiscal multipliers (no monetary policy reaction) and do not account for cross-border spillovers into LAC.
- Considerations on multiplier effectiveness during COVID-19:
  - Higher multipliers expected during crises, but supply disruptions and high uncertainty may mute effects in containment phase.
  - Informality and inequality lower multipliers; evidence shows multipliers "as high as 2 over two years in low informality settings and close to zero in high informality settings."
  - Alternative evaluation metric: household income and employment stabilization may be more relevant during containment.
- Headline results:
  - Announced above-the-line fiscal measures raise the region’s level of real GDP "by about 5 percent, especially within a year."
  - Below-the-line and off-budget measures (loans, equity, asset-purchases) multipliers: loans/equity/asset programs range from "0.5 to 0.8"; credit guarantee programs multiplier about "0.2" on guaranteed amount.
  - Combined effect if fully implemented: above- and below-the-line and off-budget measures would raise region’s real GDP by "about 6½ -7 percent within a year."
  - Aggregate counterfactual: absent these programs, GDP could have been "between 1½ to 2 percent smaller."

### Impact heterogeneity across countries and instruments
- Reported country-level GDP impacts of above-the-line packages range from "0.5 percentage points in Mexico to close to 8 percent in Brazil and Peru."
- Differential effects reflect package size, duration (temporary vs permanent), composition (instrument multipliers), and trade openness (more open economies have larger import leakages).
- Example: Chile’s large package has a relatively small GDP effect because of composition toward low-multiplier measures and high openness.

### LA5: financing needs, policy choices, and medium-term legacies
- LA5 countries covered: Brazil, Chile, Colombia, Mexico, Peru.
- Projected 2020 gross financing needs (LA5):
  - Brazil: "more than 25 percent of GDP."
  - Mexico: "15 percent of GDP."
  - Chile, Colombia, Peru: "about 10 percent of GDP."
- Financing mix:
  - Sizable part financed via local currency debt issuance.
  - Colombia and Peru rely relatively more on external debt issuance.
  - Brazil and Chile relied heavily on the use of liquid assets.
- Debt legacies and spreads:
  - Government debt ratios projected to increase "by more than 10 percent of GDP in the region in 2020" and remain elevated.
  - By 2022, gross debt to GDP projected to remain above 2019 level in most LAC countries.
  - Historical relationship: a 1 percent of GDP increase in public debt associated with an increase in sovereign EMBI spreads of "8-14 basis points in the LA5"—conditional on institutional quality.
  - Pandemic-related debt increases, if not reversed, would imply higher sovereign spreads by:
    - Chile: "100 basis,"
    - Colombia and Mexico: "160-180 basis points,"
    - Brazil and Peru: "200 basis points."
  - The surge in debt could result in "half-a-notch worse credit ratings in general."
- Interest-growth differentials:
  - Differentials expected to exceed "7½ and 2 percent, respectively, in the LA5 and rest of the region in 2020."
  - Differentials are expected to turn negative in 2021-2022, though not large enough to substantially reduce debt ratios.

### Fiscal policy during partial reopening and recovery-phase guidance
- Countries with fiscal space:
  - Gradually withdraw emergency lifelines while improving targeting.
  - Provide broad-based stimulus to facilitate recovery, including temporary payroll tax cuts, time-bound value-added or sales tax reductions, temporary investment incentives, and additional public investment (repair and maintenance).
  - Accompany stimulus with explicit commitments to rebuild fiscal buffers in the medium term.
- Countries with limited fiscal space:
  - Prioritize measures with largest social impact (health care, unemployment benefits/social assistance).
  - Increase spending efficiency and revenue mobilization.
  - Explore low-cost financing (multilaterals).
  - Postpone structural adjustments until pandemic under control.
- LA5 recovery examples:
  - Brazil: extended lifelines including "Auxilio Emergencial" and support for formal employment.
  - Chile: temporary SME CIT reduction from "25 percent to 12.5 percent"; "100 percent instantaneous depreciation allowance" for new investment projects.
  - Colombia: emergency lifelines of about "2.5 percent of GDP" expected to be scaled down in 2021; transfers to health providers retained.
  - Mexico: limited support via public works and urban development projects estimated at "about 0.2 percent of GDP."
  - Peru: public works program; expanded credit support; new cash transfer program; subsidies on electricity bills and public transportation.

### A looming policy reversal and alternative adjustment scenarios
- Baseline WEO projection:
  - LAC’s fiscal impulse (change in primary fiscal balance) expected to turn from a loosening of "about 7 percent of GDP in 2020" to a tightening of "about 5 percent of GDP in 2021," followed by moderate tightening over the medium term.
  - In the baseline, fiscal policy is a major headwind in 2021, lowering region’s GDP between "3 to 9 percent" depending on adjustment composition.
  - Beyond 2021, fiscal policy has only small negative growth effects.
- Alternative scenario (more gradual adjustment):
  - More gradual adjustment anchored by fiscal rules or credible medium-term strategies would be more growth-friendly initially.
  - Under the alternative, the growth drag is "only 1-3 percent of GDP in 2021-22."
  - To enhance credibility, options include passing legislation (e.g., "pre-approval" of tax reforms) to lock in medium-term consolidation.
  - Exact size and speed of adjustments depend on country-specific fiscal space and financing access.

### Medium-term fiscal strategies and structural reforms
- Rebuilding buffers and fiscal rebalancing:
  - Debt stabilization or reduction over the medium term is necessary in many countries to provide shock buffers.
  - Past easing cycles were not followed by rebalancing, producing persistent increases in current spending that are hard to reverse.
  - Governments should reprioritize spending toward efficiency gains: scope exists in many cases to increase capital and social spending while curtailing overall spending.
- Structural reform priorities:
  - Safeguard social protection and enhance automatic stabilizers (unemployment benefits and SSNs) to reduce inequality and boost post-COVID growth.
  - Strengthen automatic stabilizers to enable liquidity-constrained households to smooth consumption during shocks.
  - Address legacy effects and long-standing structural issues through fiscal policy and framework reforms.

### Social Safety Nets (SSNs) in LA5: coverage, adequacy, and reforms
- Desirable SSN attributes:
  - Broad coverage and adequate benefits for vulnerable groups.
  - Cost effectiveness by avoiding fragmentation and overlaps.
  - Preservation of work incentives and enhancement of human capital via links to public works, health, education, training.
  - Financial sustainability consistent with other social protection programs.
- Current LA5 shortcomings:
  - Gaps in coverage and benefit adequacy; fragmentation and overlaps; limited unemployment insurance coverage; leakage to higher-income groups (notably Chile, Mexico, Colombia).
  - SSNs have contributed to poverty-gap reduction by "7–25 percent" across LA5 countries.
- Improvement options:
  - Expand coverage via proxy-means targeting using statistical algorithms.
  - Reduce duplications and rationalize transfer levels after strengthening administrative capacity.
  - Strengthen progressive income taxation to claw back benefits from high-income groups.
  - Use mobile money, in-kind transfers, social registries, and community identification to reach informal sector.
  - Introduce or expand unemployment insurance (example: extend Mexico City’s scheme nationally).
- Mobilizing revenues to safeguard social spending:
  - Raising revenues is indispensable for medium-term sustainability while safeguarding social spending.
  - Tax reform scope exists in Colombia, Mexico, and Peru: improve tax collections, rationalize inefficient/regressive income tax expenditures, and raise top personal income tax brackets.

### Improvements to fiscal frameworks and public investment
- Fiscal frameworks:
  - Need credible operational rules (enforceable deficit targets) and medium-term nominal anchors (e.g., debt ceilings).
  - Escape clauses provided crisis flexibility; deviations must be temporary and frameworks should embed correction mechanisms.
  - Communicate commitments to restore rules where suspended; consider embedding correction mechanisms and pre-approving tax reforms to secure consolidation.
- Public investment:
  - Scale up public investment gradually within sustainable frameworks and improve public investment management.
  - Priorities: health care, digital infrastructure, climate adaptation and mitigation.
  - Prepare pipelines of carefully appraised projects and commence planning for new priorities.

### Annex findings: debt dynamics and automatic stabilizers
- Debt dynamics (LA5, 2013-2019):
  - Debt-to-GDP ratio increased cumulatively by "over 15 percentage points of GDP" in LA5, versus "about 7 percentage points of GDP" for rest of region.
  - Interest-rate-growth differential accounted for a cumulative increase of "about 5 percent of GDP" over 2013-2019 in LA5.
  - For the rest of the region, exchange-rate depreciation accounted for "over 9 percent of GDP" of the increase in debt (versus "5 percent of GDP for LA5").
  - Drivers of LA5 primary-balance deterioration after 2012: end of commodity super-cycle, sluggish growth, and policies addressing social tensions and Venezuela-related migration.
  - LA5 average revenues to GDP fell from "over 30 percent" during 2007-2012 to "less than 28 percent" over 2013-2019; expenditures remained broadly constant in most countries.
- Automatic stabilizers (elasticities and projections):
  - Point elasticities around "1" for both income taxes and taxes on goods and services for full sample; during recessions elasticity increases to "1.5 for income taxes" and "1.3 for G&S taxes."
  - Tax revenue expectations for 2020:
    - Tax revenues expected to decrease by "about 1 percent of GDP in the LA5" and "about 2 percent of GDP in the rest of the region" in 2020 versus 2019.
    - Mexico is an exception with an increase in IT revenues as a share of GDP in 2020 (strong first 9 months and admin initiatives).
    - Colombia projected to register a relatively larger decline in IT revenues reflecting a corporate tax reform reducing IT revenues in 2020 by "about 0.5 percent of GDP."
    - Peru’s G&S ratio projected to decline relatively more due to lockdown-related consumption adjustments.
  - In LA5, high informality implies the size of automatic stabilization of income taxes is toward the lower end of the OECD range of "20-50 percent" of income shocks.
  - Progressivity and tax expenditures:
    - Room to improve progressivity in Chile and Peru based on average effective tax rates.
    - Mexico: tax expenditures for CIT and PIT accounted for "1.5 percent of GDP in 2019"; at least "0.7 percent of GDP" of these are inefficient or regressive and could be rationalized; threshold for top PIT bracket should be lowered.
  - SSNs and unemployment benefits:
    - Unemployment benefit systems are underdeveloped or non-existent in some LA5 countries while SSNs are relatively large.
    - SSNs help reduce poverty gaps by "7–25 percent" across LA5.

### Annex Figure 2.3 — Composition and Poverty Reduction Impact of SSNs (key numeric values)
- SSN total size (Percent of GDP) in figure sequence Brazil; Chile; Colombia; Mexico; Peru; EME (median); LAC (median):
  - Values: "1.34; 3.50; 3.00; 2.31; 1.44; 1.52; 1.53."
- Instrument categories shown: Conditional Cash Transfer; Unconditional Cash Transfer; Social pension; School feeding; Public works; Food and in-kind; Fee waivers; Other Social Assistance.
- Poverty-gap reduction metric reported as simulated percentage change in poverty gap owing to SSN programs (calculation: (poverty gap pre transfer - poverty gap post transfer) / poverty gap pre-transfer). Cross-country differences reflect instrument choice, coverage, adequacy, and targeting.
- Comparative observations:
  - Chile and Colombia: SSNs cover large share of poorest quintile but benefit adequacy low; larger leakages to the rich than in Brazil and Mexico.
  - Brazil and Mexico: smaller coverage of poorest quintile but higher benefit adequacy for beneficiaries.
  - Brazil stands out for relatively high benefits/beneficiary incidence.

_International Monetary Fund — Regional Economic Outlook: Western Hemisphere (October 2020), "Fiscal policy at the time of a pandemic: How have Latin America and the Caribbean fared?"_

### Introduction

### Introduction

### Overview of the shock
- The COVID-19 pandemic is described as "an unprecedented global synchronized shock and a public health crisis with no medical solution yet."
- The level of real GDP for 2020 in the region is expected to be "about 9 percent lower than what was forecast in early-2020."
- "A large fraction of this output loss is projected to persist in 2021" with "considerable uncertainty about the legacy effects of the crisis."

### Fiscal responses and size of announced measures
- Governments announced packages of fiscal support including increased health spending and a wide range of "emergency lifelines" layered on top of automatic stabilizers.
- Emergency lifelines cited include: tax cuts and deferrals, direct transfers to vulnerable households (including expansion of existing programs), relaxation of eligibility requirements and expansion of unemployment insurance schemes, wage subsidies and loans to support payrolls, and loan guarantees.
- "Taken together, the announced measures in LAC amount, on average, to 8 percent of GDP."
- Fiscal support in LA5 countries is described as "noticeably larger and more frontloaded" compared to the Global Financial Crisis (GFC).
- Fiscal actions in most LAC economies are similar in size to those in other emerging market economies (EMEs) but "tend to be more modest than fiscal measures announced in advanced economies (AEs)."
- The extent and composition of policy support "has varied considerably across the region, depending on how hard the pandemic has hit each country, fiscal space, and effectiveness of automatic stabilizers."

### Impact on public debt and drivers (2020 projections)
- Discretionary fiscal actions, weaker economic activity, and automatic stabilizers are expected to cause public debt levels to "increase sharply in 2020."
- A simple decomposition for LA5 shows:
  - Adverse developments in terms of the real interest rate and economic growth differentials (r-g), including effects of exchange rate depreciation on foreign-currency-denominated debt, are expected to "increase debt ratios by over 12 percent of GDP in the LA5."
  - "Higher primary deficits would also add another 6 percent of GDP to debt."
  - This effect is "partially compensated by other factors (stock-flow adjustment)."

### Fiscal positions before the pandemic and financing vulnerabilities
- The majority of countries entered the pandemic with "more vulnerable fiscal positions—higher fiscal deficits and public debt as percent of GDP—than before the Global Financial Crisis (GFC)."
- Contributing factors include the end of the commodity super-cycle, low growth, and high real interest rates adjusted for exchange rate depreciation.
- Example of constrained fiscal space: "in Brazil and Costa Rica, the overall fiscal deficit prevailing in 2019 was already much larger than the one that would be compatible with a debt level target of 60 percent of GDP, if maintained over a 10 year period."
- Revenue and expenditure context:
  - Over 2017–2019, average government revenues in the LA5 and LAC were "about 25 percent of GDP."
  - This revenue level was "3 percentage points of GDP lower than emerging market economies’ average."
  - Revenues in LAC and LA5 were "about 88 percent of expenditures," compared to "more than 91 percent of expenditures in emerging market economies."
- Financing vulnerabilities:
  - "Gross financing needs coming into the crisis were generally high in the region—exceeding 10 percent of GDP in many economies."
  - Financing needs reflect "financing needs related to high levels of maturing debt (over 6 percent of GDP in many countries)."
  - As of 2019, "the average share of foreign-currency-denominated debt in total debt in the region exceeded   50 percent."
  - Notwithstanding, "in Brazil, Chile, Costa Rica, Mexico and Peru, the shares of foreign--denominated debt in total debt are well below 50 percent."
  - Average maturity of debt is "short in some countries, including Ecuador and Brazil," while "a few countries, notably Uruguay and Peru, have successfully lengthened the average maturity profile of public debt."
- Foreign investors’ participation in local debt markets:
  - Increased foreign participation can deepen markets but "could also be an additional source of vulnerability" by making local debt markets "more susceptible to sudden shifts in global market sentiment."
  - Since 2014, foreign investors’ participation "has increased significantly in Colombia (from low levels), declined in Brazil and Mexico (albeit from high levels in the case of the latter) and fluctuated around high levels in Peru."
  - "Peru stands out as having a relatively high foreign investors’ participation rate" compared to other EMEs.

### Transmission channels: how COVID-19 affects fiscal positions
- Slower economic activity and increased government spending:
  - Containment measures, sector shutdowns, and social distancing have caused a "sudden stop" in labor supply and declines in sectoral and aggregate demand.
  - The sharp decline in economic activity has caused a reduction in tax bases and revenues and triggered higher unemployment and social safety net spending.
  - Weaker activity has contributed to lower global prices in some commodities, "especially oil," leading to lower commodity-related investment and lower fiscal receipts in exporting countries.
  - Provision of discretionary lifelines to households and firms has resulted in higher government expenditures.

*Source: Regional Economic Outlook: Western Hemisphere (October 2020), "Fiscal policy at the time of a pandemic: How have Latin America and the Caribbean fared?"*

### 2.  Emerging Market Economies, 2020Q1

### 2. Emerging Market Economies, 2020Q1

### Capital flows, risk aversion, and exchange rates
- Capital outflows increased the cost and lowered the availability of funding, more so than during the GFC and in other EMEs, in the beginning of the pandemic, but have since partially reversed or stopped (October 2020 Regional Economic Outlook: Western Hemisphere).
- Large capital outflows have led to large exchange rate depreciations, which have adverse effects on gross debt in countries with a large share of foreign-currency-denominated debt.

### Fiscal policy phases and priorities during the Great Lockdown
- The pandemic is characterized in three phases: a lockdown/containment phase; a gradual reopening under uncertainty; and a post-pandemic phase.
- In the acute containment phase, fiscal policy priorities:
  - Protecting lives and livelihoods (Chapter 1 of the April 2020 Fiscal Monitor).
  - Accommodate higher spending on health care and emergency services.
  - Adopt timely, temporary, and targeted fiscal actions to protect households and firms, including in hard-to-reach informal sectors.
- Guidance: Given significant fiscal costs, measures should be transparently embedded in medium-term fiscal frameworks (“do whatever it takes but make sure to keep the receipts”).

### Discretionary measures: Above-the-line (health spending and emergency lifelines)
- Above-the-line measures mainly on the spending side, mostly supporting households.
- Examples of above-the-line interventions:
  - Increased health spending (all countries).
  - Wage subsidies/complements (all LA5).
  - Expanded social safety nets (Brazil, Chile, Colombia, Peru).
  - Enhanced unemployment benefits (Chile, Colombia).
  - Public investment programs in some countries (Peru).
- Revenue-side measures (more limited and aimed at supporting businesses):
  - Suspension of corporate income tax payments (Chile, Colombia).
  - Temporary elimination of financial transaction tax (Brazil).
  - Elimination of road tolls during quarantines.
  - Temporary VAT and tariff eliminations on certain products/services (Colombia).
- Implementation notes:
  - Most household support (transfers) measures are being implemented (notably in the LA5).
  - Some countries experienced delays in implementation of investment plans and in health expenditure.

### Discretionary measures: Below-the-line and off-budget actions
- Governments provided below-the-line cashflow support: loans, equity injections, asset purchases, debt assumptions.
- Off-budget actions include incurrence of contingent liabilities, such as credit guarantees, and quasi-fiscal operations including loans by state-owned banks.
- Usage and magnitudes in 2020:
  - Heavily used in Peru, Bolivia, and Brazil (between 6.5 to 8 percent of GDP).
  - Used to a lesser extent in Belize, Chile, Colombia, El Salvador, Honduras, and Argentina (between 2 and 3.5 percent of GDP).
- Fiscal implications:
  - Some measures are reflected in financing operations and raise government debt ratios.
  - Others may not have upfront cashflow effects but could bring fiscal risks in the future.

### The role of automatic stabilizers
- Automatic stabilizers include progressive income taxes (revenue side) and unemployment benefits and social safety nets (spending side).
- Historical contribution: Automatic stabilizers have accounted for 30 percent of total fiscal stabilization in emerging market and developing economies, compared to one-half in advanced economies (Chapter 3 of the April 2015 Fiscal Monitor).
- Tax revenue expectations for 2020:
  - Tax revenues are expected to decrease by about 1 percent of GDP in the LA5 and by about 2 percent of GDP in the rest of the region in 2020 compared to 2019.
- Structural characteristics:
  - Income taxes account for about 33 percent of total tax revenues in LAC compared to over 50 percent in AEs.
  - Elasticities of tax revenues to GDP:
    - Around 1 for both income and goods and services (G&S) taxes in normal times.
    - Increase to 1.5 for income taxes and 1.3 for G&S taxes during recessions.
- Behavioral and distributional considerations:
  - Pandemic effects are highly asymmetric across sectors; consumption is disproportionately affected relative to a typical recession, which may exacerbate indirect-tax revenue declines.
  - High inequality and informality may reduce output effects of general transfers and lower multipliers; evidence suggests targeted transfers to liquidity-constrained low-income households can be particularly impactful.

### Flexibility of fiscal rules
- Fiscal reactions broadly consistent with fiscal responsibility frameworks; less ad-hoc adjustment than during the GFC.
- Built-in adjustments for cyclical factors provided considerable fiscal relaxation in Chile and Colombia.
- Most countries with escape clauses resorted to them; Colombia, Paraguay and Peru temporarily suspended their fiscal rules.
- Chile and Mexico revised their deficit targets for 2020.
- Examples and magnitudes:
  - The escape clause to Brazil's expenditure ceiling allowed additional above-the-line fiscal measures of about 8 percent of GDP, and temporary rule suspension allowed an additional 2 percent of GDP.
  - In Chile, the structural fiscal balance target was changed from -3.3 percent of GDP in January 2020 to -3.5 percent of GDP in mid-2020.
- Recommendation: Ensure use of flexibility is temporary and transparent, including explaining the size of deviation and the process to return to the rule, to preserve credibility.

### Quantifying the effects of above-the-line fiscal measures (method and considerations)
- Objective: Quantify macroeconomic effects of announced above-the-line discretionary fiscal measures announced in 2020.
- Caveat: Exercise quantifies “announced” measures; quantification of “implemented” measures is hampered by incomplete information on implementation progress.
- Considerations on fiscal multiplier effectiveness during COVID-19:
  - Fiscal multipliers tend to be higher during crises, but COVID-19 presents unique features:
    - Large output gaps and demand deficiency point to higher multipliers.
    - Supply-side disruptions from the “great lockdown” suggest a more muted impact for fiscal policy in the containment phase because the average propensity to consume is lower and there are fewer second-round effects.
    - Increased uncertainty may lower policy effectiveness via impacts on private investment and consumption.
  - Alternative evaluation: In the containment phase, evaluating fiscal policy in terms of household income and employment stabilization may be more appropriate than GDP stabilization.
  - Informality and inequality reduce multipliers; evidence shows multipliers as high as 2 over two years in low informality settings and close to zero in high informality settings.
- Modeling approach:
  - WHDMOD structural model (a module of the IMF’s Flexible System of Global Models) used to quantify effects on real GDP and government debt.
  - Start from January 2020 WEO projections; shock fiscal balance by the size of announced discretionary responses in 2020, accounting for policy instruments.
  - Simulations do not account for spillovers from the rest of the world into LAC.
  - Distinction among fiscal instruments:
    - Expenditure: (i) government consumption; (ii) targeted transfers; (iii) general transfers; (iv) government investment.
    - Revenue: (i) consumption taxes / VAT; (ii) corporate income taxes (CIT); (iii) labor taxes (including personal income taxes, PIT) and social security contributions; (iv) property taxes.
  - Multiplier ordering used in WHDMOD:
    - Expenditure multipliers: smallest for general transfers, larger for targeted transfers and government consumption, largest for investment.
    - Revenue-side: consumption, labor and property taxes have higher impact on economic activity than corporate income taxes.
    - Purely fiscal multipliers (no monetary policy reaction) are used in simulations.
- Simulation headline result:
  - For the region, the effects of the announced above-the-line fiscal measures on real GDP are sizable—raising the region’s level of real GDP by about 5 percent, especially within a year.

*International Monetary Fund | October 2020*

### 0.5 percentage points in Mexico to close to 8 percent in Brazil and Peru. The impact of fiscal support

### fiscal - 0.5 percentage points in Mexico to close to 8 percent in Brazil and Peru. The impact of fiscal support

### Impact of fiscal support on real GDP
- Above-the-line fiscal packages raised real GDP differentially across LAC economies, ranging from "0.5 percentage points in Mexico to close to 8 percent in Brazil and Peru."
- The initial boost to activity materializes through a jump in consumption from increased transfers and income support measures; investment provides considerable stimulus over the outer years.
- Over the medium term, effects of above-the-line fiscal measures on GDP dissipate as most economies are expected to unwind the stimulus and embark on partial consolidation.
- More open economies have relatively larger leakages through imports, resulting in relatively smaller impacts on economic activity, all other things being equal.
- Chile’s large above-the-line package has a relatively small GDP effect because its composition has a relatively high weight on low-multiplier measures and Chile is the most open economy in LA5.

### Fiscal multipliers and composition
- Fiscal multipliers differ by instrument (impact on real GDP; percent deviation from baseline):
  - Government consumption, Government investment, General transfers, Targeted transfers, Consumption tax, CIT, Labor tax, Property tax (lump sum) — shown with ranges in Figure 12 (see source for visual detail).
- Min-max ranges are provided for fiscal with monetary reaction and for (pure) fiscal measures; crises-period ranges are reported separately.
- Differential GDP effects across countries are attributed to package size, duration (temporary or permanent), composition (different multipliers), and trade openness.

### Below-the-line and off-budget measures
- Multiplier assumptions used to estimate effects on real GDP:
  - Multipliers for loans/equity/asset-purchase programs (based on Lucas (2016) for U.S. Small Business Administration and other federal credit programs): range from 0.5 to 0.8.
  - For credit guarantee programs: a multiplier of about 0.2 on the total guaranteed amount is used (which would correspond to a multiplier above unity on the capital put aside for the credit-guarantee programs).
- Aggregate effect estimates:
  - Countries in the region would have faced worse recessions absent these programs—overall, GDP could have been between 1½ to 2 percent smaller.
  - Put together, the above- and below-the-line, and off-budget measures, if fully implemented, would raise the region’s level of real GDP by about 6½ -7 percent within a year.

### Projected financing needs and financing sources for 2020 (LA5)
- Implementation of support packages is expected to lead to large fiscal deficits and large financing needs in 2020.
- Among the LA5 countries, gross financing needs are:
  - more than 25 percent of GDP in Brazil,
  - 15 percent of GDP in Mexico,
  - about 10 percent of GDP in Chile, Colombia, and Peru.
- Financing mix:
  - All LA5 countries are expected to fill a sizable part of their needs through issuance of local currency debt.
  - Colombia and Peru resort relatively more to issuance of external debt.
  - Brazil and, to a lesser extent, Chile have relied heavily on the use of liquid assets.
- Components shown in Figure 15: Use of liquid assets; Issuance of external debt; Issuance of local currency debt; Amortization and interest payments; Primary deficit.

### Fiscal policy during partial reopenings and recovery-phase guidance
- Role of fiscal policy with substantial cyclical slack: facilitate resumption of activity and protect the most vulnerable.
- Countries with fiscal space:
  - Follow a gradual approach in withdrawing emergency lifelines while improving targeting.
  - Provide broad-based stimulus to facilitate recovery, potentially including temporary payroll tax cuts, time-bound value-added or sales tax reductions, temporary cost-based incentives for private investment, and additional public investment (repair and maintenance activities).
  - Accompany stimulus with explicit and well-communicated commitments to rebuild fiscal buffers in the medium term.
- Countries with limited fiscal space:
  - Prioritize preserving measures with largest social impact (e.g., health care, unemployment benefits/social assistance).
  - Increase efficiency of spending and revenue mobilization.
  - Explore low-cost financing sources (such as from multilateral institutions).
  - Postpone structural adjustments to after the pandemic is under control.
- LA5 recovery measures (examples):
  - Brazil: extended lifelines until end of year, including transfers to low-income households and informal workers (“Auxilio Emergencial”) and support for formal employment.
  - Chile: temporary reduction of the corporate income tax rate for SMEs from 25 percent to 12.5 percent; 100 percent instantaneous depreciation allowance for new investment projects.
  - Colombia: emergency lifelines of about 2.5 percent of GDP expected to be scaled down in 2021; transfers to health providers retained.
  - Mexico: limited support through public works and urban development projects estimated at about 0.2 percent of GDP during gradual reopening.
  - Peru: public works program; expanded credit support programs; new cash transfer program for households; subsidies on households’ electricity bills and public transportation.

### Legacies for public finances
- Debt and financing costs:
  - Government debt ratios are projected to increase by more than 10 percent of GDP in the region in 2020 and are expected to remain elevated going forward.
  - By 2022, gross debt to GDP is projected to remain above the 2019 level in most LAC countries.
- Historical relationships and projected spread impacts:
  - Historically, a 1 percent of GDP increase in public debt is associated with an increase in sovereign EMBI spreads of 8-14 basis points in the LA5—conditional on institutional quality.
  - The pandemic-related increase in public debt, if not reversed, would imply higher sovereign spreads by:
    - Chile: 100 basis,
    - Colombia and Mexico: 160-180 basis points,
    - Brazil and Peru: 200 basis points.
  - The surge in debt could result in half-a-notch worse credit ratings in general, with somewhat larger effects in countries with relatively higher expected debt increases.
- Elevated financing-cost differentials:
  - Interest rate-growth differentials are expected to exceed 7½ and 2 percent, respectively, in the LA5 and rest of the region in 2020.
  - Differentials are expected to turn negative in 2021-2022, but sizes are not large enough to have a substantial effect on debt ratios; marginal borrowing costs can rise abruptly prior to defaults.

### A looming policy reversal and alternative scenarios
- Baseline WEO projection:
  - LAC’s fiscal impulse measured by change in primary fiscal balance is expected to turn from a loosening of about 7 percent of GDP in 2020 to a tightening of about 5 percent of GDP in 2021, followed by additional moderate tightening over the medium term.
  - In the baseline, fiscal policy is a major headwind against recovery in 2021 in LAC, lowering the region’s GDP between 3 to 9 percent depending on composition of fiscal adjustment.
  - Beyond 2021, fiscal policy will have only small negative growth effects (illustrated in Figure 20).
- Alternative scenario (more gradual adjustment):
  - A more gradual adjustment anchored by fiscal rules or fiscal “forward guidance” backed by credible medium-term fiscal strategies would be more growth-friendly in initial years after the worst of the pandemic.
  - Under the alternative, the growth drag is only 1-3 percent of GDP in 2021-22.
  - To provide credibility, countries could consider passing legislation (such as “pre-approval” of tax reforms) to ensure medium-term consolidation occurs.
  - Exact size and speed of adjustments depend on each country’s fiscal space and access to financing.

### Medium-term fiscal strategies and structural reforms
- Rebuilding fiscal buffers:
  - Debt stabilization or reduction over the medium term is necessary in many countries to provide buffers against future adverse shocks.
  - Debt ratios rose persistently; past easing cycles were not followed by commensurate normalizing or rebalancing, resulting in permanent increases in current spending that are hard to reverse.
  - Governments should reprioritize spending toward efficiency gains, with scope in many cases to increase capital and social spending while curtailing overall spending.
- Structural reforms to consider:
  - Safeguarding social protection and enhancing automatic stabilizers (unemployment benefits and social safety nets) to reduce inequality and boost growth post-COVID-19.
  - Strengthened automatic stabilizers would enhance macroeconomic resilience by enabling liquidity-constrained households to smooth consumption more effectively during income shocks.
  - Address legacy effects of the crisis and long-standing structural issues through fiscal policy and framework reforms.

*Source: Regional Economic Outlook: Western Hemisphere (October 2020), IMF.*

### 1.  LA5

### LA5

### Countries covered
- LA5 = Latin America 5: Brazil, Chile, Colombia, Mexico, Peru

### Social safety nets (SSNs): gaps, design attributes, and improvements
- A good social safety net usually has four attributes:
  - Provides broad coverage and adequate benefits to vulnerable groups in a progressive way within the overall tax-benefit system.
  - Is cost effective by avoiding program fragmentation and beneficiary overlaps.
  - Preserves work incentives and enhances human capital by linking transfers to required or voluntary programs (public works, health care, education and training).
  - Is financially sustainable within the overall expenditure envelope and consistent with other social protection programs.
- Current shortcomings in LA5:
  - Significant gaps in coverage of lower income groups and benefit levels (generosity) in some countries.
  - Programs are often fragmented, involve beneficiary overlaps, and lack appropriate incentive features.
  - Very few of the poor are covered by unemployment insurance; the burden of income support falls mostly on SSNs.
  - Relatively large leakage of benefits to higher-income groups in Chile, Mexico, and Colombia.
- Options to improve SSNs:
  - Expand coverage cost-effectively through proxy-means targeted transfers using statistical algorithms that predict incomes or consumption or poverty.
  - Decrease transfer levels and duplications once administrative capacity is strengthened.
  - Strengthen progressive income tax systems to claw back benefits from high-income groups.
  - Use instruments effective for reaching the most in need, including in the informal sector: mobile money, in-kind transfers (education and health), existing social registries, and community-based identification methods.
  - Introduce or improve unemployment insurance schemes (example noted: extension of Mexico City’s unemployment benefits scheme to the whole country).

### Mobilizing revenues
- Because social spending is expected to be safeguarded, raising revenues is indispensable for medium-term fiscal sustainability.
- Significant scope for tax reforms in several LAC countries, including Colombia, Mexico, and Peru.
- Tax reform priorities (country-specific):
  - Improve tax collections through policy and administration actions.
  - Rationalize inefficient and regressive income tax expenditures.
  - Raise the top personal income tax brackets.

### Improving fiscal frameworks
- The pandemic highlighted necessary adjustments in fiscal frameworks/rules:
  - Some countries still need credible operational rules, such as enforceable deficit targets.
  - Fiscal frameworks would benefit from complementing operational rules with a medium-term nominal anchor, such as a debt ceiling.
  - Escape clauses provided flexibility during the crisis, but deviations must be temporary and frameworks should have adequate correction mechanisms for deviations from operational rules and debt thresholds.
  - Countries where fiscal rules were suspended should communicate commitments to restore rules, conditional on the state of the recovery.
  - Consider formally embedding correction mechanisms within existing fiscal rules and passing legislation (such as “pre-approval” of future tax reforms) to help ensure medium-term consolidation.

### Investing to boost potential growth
- Potential GDP growth weakened pre-pandemic due to low productivity, demographic headwinds, and structural issues; the pandemic will likely weaken potential growth further.
- Recommendation: scale up public investment gradually within frameworks that ensure fiscal sustainability and improve public investment management.
- Investment priorities for the post-pandemic economy: health care, digital infrastructure, and climate change adaptation and mitigation.
- Policymakers should prepare a pipeline of carefully appraised investment projects and start investment planning for new priorities.

### Macroeconomic and policy impact of fiscal measures during the pandemic
- Simulations suggest announced above-the-line measures, if fully implemented, would raise the region’s real GDP by about 5 percent within a year—relative to the case if these measures were not implemented.
- Announced below-the-line and off-budget measures, if fully implemented, would add another 1½ to 2 percent in the short term to the region’s real GDP level, bringing the total real GDP effect of policies to 6½-7 percent.
- Implementation is likely to be less than 100 percent in many cases, leading to more moderate GDP effects.
- Policy guidance as lockdowns lift:
  - Fiscal policy should boost demand with stimulus to support resumption of activity, calibrated to each country’s fiscal space.
  - Avoid looming policy reversal in the short term; pursue more gradual consolidation to ensure medium-term sustainability, accompanied by clear and credible commitments to future consolidation.

### Concluding policy agenda (post-pandemic)
- Rebuild fiscal buffers and undertake fiscal policy/framework reforms to address COVID-19 legacy effects and long-standing structural issues:
  - Safeguard social protection.
  - Strengthen automatic stabilizers.
  - Raise revenues.
  - Better calibrate fiscal rules and embed correction mechanisms where needed.
  - Gradually scale-up public investment to boost potential growth and accelerate transformation to resilient and sustainable economies.

### Annex — Debt dynamics in LA5 before the pandemic
- The debt-to-GDP ratio increased cumulatively by over 15 percentage points of GDP in the LA5 countries over 2013-2019, compared to about 7 percentage points of GDP for the rest of the region.
- In LA5, the interest rate-growth differential accounted for a cumulative increase of about 5 percent of GDP over 2013-2019 compared to an increase of about 1.5 percent of GDP in the previous period.
- For the rest of the region, exchange rate depreciation played a significant role in the increase in debt (accounting for over 9 percent of GDP, compared to 5 percent of GDP for LA5 economies).
- Drivers of LA5 primary balance deterioration after 2012 included the end of the commodity super-cycle, sluggish economic growth, and policies addressing social tensions and migration from Venezuela (affecting Chile and Colombia in particular).
- For LA5, average revenues to GDP fell from over 30 percent during 2007-2012 to less than 28 percent over 2013-2019, while overall expenditures to GDP remained broadly constant in most countries (with Chile, Colombia, and to a lesser extent Peru experiencing rapid expenditure increases in the latter period).

### Annex — Automatic stabilizers in LAC and LA5 specific findings
- Automatic stabilizers include progressive income taxes (revenue side) and unemployment benefits and SSNs (spending side).
- Elasticity estimates (heterogeneous panel regressions, 1991-2019):
  - Point estimates of elasticities around 1 for both income taxes and taxes on goods and services (G&S) for the full sample.
  - During recessions (output gap negative), elasticity estimates increase to:
    - 1.5 for income taxes.
    - 1.3 for G&S taxes.
- Tax revenue projections for 2020 (main components for larger economies in LA projected to decline as a share of GDP):
  - Mexico is the only exception with an increase in IT revenues as a share of GDP in 2020, reflecting strong revenue performance in the first 9 months of 2020 and tax administration initiatives.
  - Colombia is projected to register a relatively larger decline in IT revenues as a share of GDP, reflecting the corporate tax reform approved in 2019 projected to reduce IT revenues in 2020 by about 0.5 percent of GDP.
  - Peru’s G&S ratio projected to decline relatively more than others, reflecting lockdown-related consumption adjustments.
- In LA5, due to a high degree of informality, the size of automatic stabilization of income taxes is toward the lower end of the OECD range of 20-50 percent of income shocks.
- Progressivity and tax expenditures:
  - There is room to improve progressivity of income taxation in Chile and Peru based on average effective tax rate (AETR) by personal income level.
  - Broadening the revenue base in all LA5 countries could foster income stabilization.
  - In Mexico, tax expenditures for CIT and PIT accounted for 1.5 percent of GDP in 2019; at least 0.7 percent of GDP of these tax expenditures are inefficient or regressive and could be rationalized while the threshold for the top PIT bracket should be lowered.
- Role of SSNs and unemployment benefits:
  - Unemployment benefit systems are underdeveloped or non-existent in some LA5 countries, while SSNs are relatively large.
  - SSNs have contributed to a reduction of poverty gaps by 7–25 percent across the LA5 countries.

*Source: IMF, World Economic Outlook database; and IMF staff calculations.*

### Annex Figure 2.3. Composition and Poverty Reduction Impact of SSNs

### Annex Figure 2.3. Composition and Poverty Reduction Impact of SSNs

### Composition (Percent of GDP)
- Panel shows composition of Social Safety Nets (SSNs) by instrument and total size (Percent of GDP).
- Country/region sequence in the figure: Brazil; Chile; Colombia; Mexico; Peru; EME (median); LAC (median).
- Values shown in the figure (Percent of GDP): 1.34; 3.50; 3.00; 2.31; 1.44; 1.52; 1.53.
- Instrument categories displayed in the figure: Conditional Cash Transfer; Unconditional Cash Transfer; Social pension; School feeding; Public works; Food and in-kind; Fee waivers; Other Social Assistance.
- Note: Apart from Mexico, which reports the size of its SSN in 2020, all other numbers are the latest available before the outbreak of COVID-19.

### Poverty Reduction Impact (Percent)
- Panel reports simulated percentage change reduction in the poverty gap owing to social safety net programs.
- Calculation used: (poverty gap pre transfer - poverty gap post transfer) / poverty gap pre-transfer.
- The figure presents simulated poverty gap reduction (%) for: Brazil; Chile; Colombia; Mexico; Peru; EME (median); LAC (median).
- Source data for the simulation: ASPIRE (World Bank); national authorities; and IMF World Economic Outlook database.

### Key findings and cross-country comparisons
- The choice of instruments, coverage of the poor, adequacy of benefits, and targeting of SSNs vary significantly across the LA5 countries.
- Tradeoffs arise between automatic stabilization, poverty-gap reduction, and fiscal cost due to these SSN design features.
- Comparative observations:
  - Chile and Colombia: SSNs cover a large share of the poorest quintile, but adequacy of benefits for the poorest quintile is relatively low. Leakages to the rich are larger than in Brazil and Mexico.
  - Brazil and Mexico: SSNs cover a smaller share of the poorest quintile (Chile and Colombia cover larger shares), but the adequacy of benefits for the poorest quintile in Brazil and Mexico is relatively high.
  - Brazil stands out for relatively high benefits/beneficiary incidence.
- Calculations and supporting detail for coverage, adequacy, and targeting are provided in Annex Figures 2.4 and 2.5 (coverage measured as percent of quintile receiving SSN benefit; adequacy measured as total transfer amount received by beneficiaries in a quintile as a percent of pre-transfer total income/expenditure of beneficiaries).

### Definitions, notes, and data sources
- SSNs definition: Noncontributory transfer programs aimed at low-income households or the vulnerable (World Bank 2018, IMF 2019). They are financed from government revenues and include:
  - (1) cash transfers, food stamps, child allowances, and social pensions;
  - (2) in-kind transfers;
  - (3) income-support schemes for low-income households, conditional on education or health;
  - (4) public works;
  - (5) fee waivers, including for health care.
- Note on coverage and adequacy metrics: Coverage measures the percentage of the quintile that receives a SSN benefit. Adequacy of benefits measures the total transfer amount received by all beneficiaries in the quintile as a percent of the pre-transfer total income/expenditure of beneficiaries (in that quintile). Calculations are based on pre-COVID-19 information.
- Sources: ASPIRE (World Bank); national authorities; IMF World Economic Outlook database; IMF FAD Social Protection & Labor - Assessment Tool (SPL-AT).

*Source: Annex Figure 2.3, fiscal - Annex Figure 2.3. Composition and Poverty Reduction Impact of SSNs (from the supplied content).*

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_Source: https://www.imf.org/-/media/files/publications/reo/whd/2020/oct/english/fiscal.pdf_