By: Staff Writer
May 26, 2023
A United Nations Economic Commission for Latin America and the Caribbean (ECLAC) report states that the region is back to its pre-pandemic low growth pattern despite tax revenues being buoyant for 2022.
ECLAC released its Fiscal Panorama of Latin America and the Caribbean, 2023 report where it said that while there were narrowing deficits, public debt levels remained particularly high. In the challenging post COVID-19 environment where stimulus was brought to bear on the entire world, the report said: “For the region’s economies to recover and to meet investment needs and social demands, proactive public policies will be required. This calls for a new fiscal pact that lays the foundations for a fiscal sustainability framework focused on increasing permanent revenues to meet well-being, investment and environmental sustainability needs.
“To this end, it is necessary to increase not only the level of tax collection, but also its progressiveness and capacity to reduce income and wealth inequalities. Integral to this new framework is developing a strategic approach to public spending policy to make it more effective at narrowing social divides and boosting the growth potential of the economy, giving priority to measures that yield high economic, social and environmental returns.”
“One of the main challenges in taxation in the region is strengthening personal income tax…. The collection of personal income tax is weak in the region, representing the main tax gap between the countries of the region and those of the Organisation for Economic Co-operation and Development (OECD). In addition, this weakness severely hampers the redistributive power of the tax system. It is therefore worthwhile to consider reforms in this key tax, including a review of marginal rates, tax bases, the treatment of various types of income, and strengthening taxation of high-income earners and high net worth individuals.”
The report also said: “The outbreak of the conflict between the Russian Federation and Ukraine in February and the subsequent application of economic and financial sanctions by the European Union and the United States, among other countries, further reduced growth expectations for the year and led to increased volatility in international financial and commodity markets. There were sharp rises in the prices of energy commodities, particularly crude oil and natural gas, which in turn affected the prices of other key inputs such as fertilizers for agriculture. At the same time, the prices of a number of agricultural commodities soared, reflecting the importance of exports from the Russian Federation and Ukraine. These trends added to burgeoning global inflationary pressures, prompting rapid and synchronized monetary policy tightening by the major central banks in advanced economies with the aim of anchoring inflationary expectations. In this environment, there was a sharp reduction in capital flows to emerging markets.
“The deterioration in global macrofinancial conditions affected the performance of the region’s economies. Economic activity slowed during the year as a result of the phasing out of the emergency fiscal stimulus spending carried out to cope with the coronavirus disease (COVID-19) pandemic in 2020 and 2021, the loss of household purchasing power and the impact of tighter monetary policy on the cost of credit, among other factors. Although labour markets improved, with participation and employment levels rising and unemployment rates falling, rising prices led to a contraction in real wages. Central banks applied a restrictive monetary policy, continuing the gradual increase in interest rates that had started in 2021.”
Given these conditions, it is possible that the region could return to the low growth rates that prevailed in the period before the COVID-19 crisis. ECLAC estimates that economic growth in the decade 2014–2023 will average 0.8 percent, a rate lower than that of the “lost decade” of the 1980s debt crisis (when the average annual rate was 2 percent a year). Potential output growth has been progressively undermined by low investment and productivity.
The region also faces increasing challenges from the rapid demographic and epidemiological transition, which have implications for growth, labour markets and the public accounts. In addition, the effects of climate change are becoming increasingly evident in the region, which is experiencing more frequent and severe natural disasters, changing precipitation patterns and prolonged heat waves, as well as rising sea levels.