## Fiscal Policy in Latin America: Prudence Today Means Prosperity Tomorrow

_IMF Blog, December 11, 2013_

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**Canonical URL:** [Fiscal Policy in Latin America: Prudence Today Means Prosperity Tomorrow](https://www.imf.org/en/blogs/articles/2013/12/11/fiscal-policy-in-latin-america-prudence-today-means-prosperity-tomorrow)

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## Bibliographic details
- Authors: Alejandro Werner
- Published: December 11, 2013

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### Fiscal position and recent history
- Public finances in most Latin American countries strengthened significantly before the global financial crisis.
- Government debt ratios declined by 16½ percentage points on average between 2002 and 2012, reflecting rapid GDP growth, falling interest costs, and solid primary surpluses in the first half of the period.
- The average maturity of debt outstanding has increased, reducing rollover and interest rate risks.
- Debt issuance in financially integrated economies has shifted decisively toward local-currency bonds, lowering exchange rate risk.
- Several countries—including Brazil, Chile, Colombia, Mexico, and Peru—have introduced or strengthened their fiscal responsibility frameworks since 2000.

### Drivers of past fiscal strength and recent reversal
- Favorable external conditions supported fiscal improvements:
  - Commodity exporters benefited from a sustained surge in global commodity prices.
  - From 2002 to 2008, fiscal revenue in the region grew from below 26 percent to above 30 percent of GDP.
  - The marked fall in global interest rates reduced average government interest bills by almost 2 percentage points of GDP over the course of the decade.
- Expansionary fiscal policies since 2009:
  - Since 2009, countries have generally increased public deficits, drawing down on their fiscal coffers.
  - Primary expenditure climbed from 24½ percent to 30 percent of GDP on average across Latin America over 2002–12.
  - Increases in the ratio of primary spending to GDP were particularly large in Argentina, Ecuador, and Venezuela, where the ratio surged by 12-23 percentage points.
  - As a result, fiscal balances are now significantly weaker than prior to the global financial crisis in most countries.

### Assessment of current conditions and policy implications
- Cyclical context:
  - Economic activity is slowing but output levels are still close to potential.
  - Tight labor markets, infrastructure bottlenecks, and widening current account deficits point to limited spare capacity.
  - It is hard to argue that more fiscal easing is needed; launching a new stimulus now would undermine credibility of countercyclical policy.
  - Monetary policy is better suited to respond to a normal cyclical slowdown.
- Structural considerations:
  - IMF research suggests potential growth rates in the region are coming down (see Chapter 3 of the May 2013 REO).
  - Growth of physical capital is expected to moderate, reflecting expected normalization of external financing conditions and stabilization of commodity prices.
  - Employment growth is likely to be limited going forward—labor participation rates are already elevated, and unemployment has fallen to record lows.
  - Unless total factor productivity growth picks up, output growth is likely to stay below the rates observed over the past decade.
  - Attempts to maintain unrealistically high growth targets through fiscal stimulus would weaken public finances.

### Policy recommendations and priorities
- Preserve and strengthen fiscal balances to:
  - Better buffer the impact of future headwinds, such as rising real interest rates and a possible decline in global commodity prices.
  - Address current imbalances, including widening external current account deficits and persistently high inflation in some countries.
  - Lay the basis for meeting the future challenge of population aging.
- Undertake expenditure reviews:
  - After a long period of continuous increases in public spending, now may be a good time to launch a thorough expenditure review to increase efficiency and reduce wasteful or untargeted expenditure.
- Avoid new fiscal stimulus given limited spare capacity and the need to restore countercyclical credibility.

*Alejandro Werner, December 11, 2013.*

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## Content in this bundle

- **A política fiscal da América Latina: Prudência hoje significa prosperidade amanhã**
  - [A política fiscal da América Latina: Prudência hoje significa prosperidade amanhã (Markdown version)](/external/lang/portuguese/np/blog/2013/121113p.pdf.md){rel="alternate" type="text/markdown"}
  - [A política fiscal da América Latina: Prudência hoje significa prosperidade amanhã (PDF)](/external/lang/portuguese/np/blog/2013/121113p.pdf){rel="external" type="application/pdf"}

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## References

- [https://www.imf.org/wp-content/uploads/2013/12/werner-latam-fiscal-blog-dec-2013-11.jpg](https://www.imf.org/wp-content/uploads/2013/12/werner-latam-fiscal-blog-dec-2013-11.jpg)
- [https://www.imf.org/wp-content/uploads/2013/12/werner-latam-fiscal-blog-dec-2013-21.jpg](https://www.imf.org/wp-content/uploads/2013/12/werner-latam-fiscal-blog-dec-2013-21.jpg)
- [https://www.imf.org/wp-content/uploads/2013/12/werner-latam-fiscal-blog-dec-2013-31.jpg](https://www.imf.org/wp-content/uploads/2013/12/werner-latam-fiscal-blog-dec-2013-31.jpg)
- [May 2013 REO](http://www.imf.org/external/pubs/ft/reo/2013/whd/eng/wreo0513.htm)

_Source: https://www.imf.org/en/blogs/articles/2013/12/11/fiscal-policy-in-latin-america-prudence-today-means-prosperity-tomorrow_