By: Staff Writer
January 21, 2022
Government expenditure is set to rise in the Caribbean for 2021 states a United Nations Economic Commission for Latin America and the Caribbean (ECLAC) report.
ECLAC released its “Preliminary Overview of the Economies of Latin America and the Caribbean” report earlier this week and it said: “In the Caribbean, total central government expenditure is projected to rise slightly in 2021, although remaining well above its 2020 level. The countries of the subregion continue to battle with the effects of the pandemic, hampered by significant additional costs arising from natural disasters in 2021. For example, in Barbados, programme-based expenditures related to the COVID-19 pandemic are projected to represent 1.0 percent of GDP in 2021 (on top of the 2.5 percent of GDP spent in 2020), while expenditures related to extreme weather and geological events (Hurricane Elsa and the eruption of the La Soufrière volcano) are expected to represent 0.8 percent of GDP (Central Bank of Barbados, 2021). It should be noted that the demands on public accounts related to natural disasters are reflected in the dynamic of capital expenditures, which are set to remain high in 2021. This is exemplified in Saint Vincent and the Grenadines with expenditures associated with reconstruction programmes following the eruption of the La Soufrière volcano, which started in December 2020 and was followed by an explosive eruption in the following April. At the same time, the increase in gross public debt in 2020 has pushed up interest payments in several countries.”
The report also said that capital expenditures in Latin America are set to increase in general, for several reasons. “These include the implementation of employment-intensive economic reactivation programmes and the lifting of the mobility restrictions that had caused public works to be suspended in 2020.
“This has also been a feature of the new fiscal measures to boost economic recovery in the advanced economies. Data on expenditure execution for the first nine months of the year show strong year-on-year growth in several countries. As a result, capital outlays are approaching the levels recorded in 2019 and, in some cases, surpassing them in absolute terms. In contrast, there have been contractions in some countries which, in general, reflect a high base of comparison relative to 2020. An example is the Dominican Republic, where significant investments were made in the previous year. These included outlays for the purchase and delivery of computers to students (in the framework of the Digital Education programme), as well as capital transfers to the National Housing Institute to finance the Dominicana Se Reconstruye plan (DIGEPRES, 2020).”
The report also said: “Fiscal policy fulfilled a key role in the COVID-19 pandemic response in 2020. Countries in Latin America announced unprecedentedly large fiscal stimulus packages, equivalent to an average of 4.6 percent of GDP, to strengthen public health systems, support families, and protect the production structure. This involved the use of the full range of fiscal instruments, including tax policy and public spending, together with liquidity support and government-backed lending programmes. Nonetheless, the role of public expenditure was predominant, with considerable increases in subsidies and transfers to mitigate the effects of the pandemic on household and business incomes. Thus, fiscal policy played an important countercyclical role in cushioning the historic slump in economic activity in 2020.
It added: “The fiscal measures adopted in that year also had repercussions on the public accounts, with implications for fiscal policy in 2021 and beyond. The growth of spending and the contraction of public-sector revenue in 2020 engendered fiscal deficits and a substantial increase in the public debt. In 2021, the countries of the region are tending to design budgets that reduce fiscal deficits and stabilize the growth of public debt. Accordingly, fiscal stimulus in the region is being dialled down, and primary expenditure is retreating in several countries —partly due to the ending of pandemic-related emergency programmes.
The environment this creates for “pro-growth fiscal policy” that supports the expansion in investment has made fiscal policy more difficult to manage, added the IDB.
As a result, the report also said: “The fiscal space needed to implement a pro-development fiscal policy is limited. Although public debt levels remain lower than in developed countries, gross public debt in the region has reached levels not seen in recent decades. At the same time, the conditions that drive the debt dynamic—such as higher interest rates, national currency depreciations, projected low growth rates for the next few years, and persistent fiscal deficits— point to debt levels remaining high, which would continue to constrict the available fiscal space. In addition, government revenues remain insufficient to fully cover public spending needs.
“Despite the current complex situation, the central role of fiscal policy in mitigating the effects of the pandemic, boosting the recovery of economic activity and laying the foundations for growth that is both sustained and sustainable in the medium term, needs to be maintained. This will require a fiscal sustainability framework focused on strengthening the generation of permanent revenues to finance permanent expenditure demands.”
The report added: “It is essential to adopt a strategic approach to spending, by targeting programmes with high economic, social and environmental returns that would contribute to a change in the development framework in the region. Public investment, which was the main adjustment variable used in the last decade, must be ring-fenced in order to undertake investments intensive in decent jobs in strategic sectors with gender equality. At the same time, the universalization of social protection systems and their financial sustainability must be key elements of fiscal policy going forward.
“In this situation, new tax policies will be needed to underpin the sustainability of the public expenditure path that the region needs to follow. These should be based on direct taxes with greater vertical equity, founded on the principle that those who have more should contribute more. However, the processes involved in modifying tax systems require a medium-term vision and the forging of social and political consensus, especially in the current context. Accordingly, it is important to adopt short-term measures (such as actions to reduce tax evasion, which amounted to US$ 325bn in 2018, equivalent to 6.1 percent of regional GDP) and review tax expenditures that represent an average of 3.7 percent of GDP.”