## A Balancing Act: Reform Options for Paraguay’s Fiscal Responsibility Law

_IMF Working Papers, November 16, 2016_

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## Bibliographic details
- Authors: Antonio David, Natalija Novta
- Published: November 16, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475555158.001

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### Key findings and purpose
- Paraguay faces a trade-off between building fiscal credibility and amending the existing fiscal rule to accommodate infrastructure investment and provide space for countercyclical policies.
- The paper discusses several alternative fiscal rules for Paraguay and presents simulations of debt trajectories in each case, assuming a baseline and three deterministic shock scenarios.
- Results suggest that potential modifications to make the fiscal rules more flexible in Paraguay should be accompanied by a number of safeguards that enhance credibility of the fiscal anchor and preserve sustainability.
- A supplementary Excel file is provided to replicate debt simulations under different fiscal rules.

### Analytical approach and scenarios
- Fiscal rule alternatives are evaluated through simulations of debt trajectories.
- Simulations assume:
  - a baseline scenario, and
  - three deterministic shock scenarios.
- Simulations are replicable via the provided supplementary Excel file.

### Substantive themes and policy implications
- Balancing credibility and flexibility:
  - Building fiscal credibility requires a credible fiscal anchor.
  - Allowing more flexibility to support capital spending and countercyclical policy increases the need for safeguards.
- Safeguards recommended (general framing in the paper):
  - Enhance credibility of the fiscal anchor when rules are made more flexible.
  - Ensure sustainability of public debt trajectories under alternative rules and shocks.
- Focus areas of reform consideration:
  - Balance rule, deficit rule, deficit ceiling, ceiling rule, expenditure rule.
  - Treatment of capital spending versus current spending in fiscal rules.
  - Public financial management (PFM) legal and regulatory frameworks.

### Subject classification and keywords
- Subject: Capital spending, Current spending, Expenditure, Fiscal policy, Fiscal rules, PFM legal and regulatory frameworks, Public financial management (PFM)
- Keywords: balance rule, capital expenditure, Capital spending, ceiling rule, Current spending, deficit, deficit ceiling, deficit rule, expenditure rule, Fiscal Governance, Fiscal Rules, Paraguay, PFM legal and regulatory frameworks, rule, WP

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/a-balancing-act-reform-options-for-paraguays-fiscal-responsibility-law-44410_