Tax revenues rose moderately across Latin America and the Caribbean (LAC) in 2019 before declining sharply in 2020 as the COVID-19 pandemic drove down global economic activity, according to new analysis released by the Inter-American Development Bank says.
Revenue Statistics in Latin America and the Caribbean 2021 shows that the average tax-to-GDP ratio in the LAC region rose to 22.9 percent in 2019, an increase of 0.3 percentage points, due largely to increases in the Caribbean sub-region. Although the COVID-19 pandemic subsequently caused a sharp decline in tax and resource revenues in 2020, the report identifies the key role of fiscal policy in the region’s response to the pandemic and considers how tax policy can contribute to a green and inclusive recovery.
Tax-to-GDP ratios in the LAC region ranged from 13.1 percent in Guatemala to 42.0 percent in Cuba in 2019. Of the 26 countries covered by the average, which includes Antigua and Barbuda for the first time and excludes Venezuela due to data availability issues, 14 registered an increase in their tax-to-GDP ratio in 2019 and 12 experienced a decline. Other than Cuba, the rest of the countries (25) recorded tax-to-GDP ratios below the OECD average of 33.8 percent. However, the gap between the LAC and OECD averages has narrowed from 15.4 percentage points in 1990 to 10.9 percentage points in 2019.
The largest increases in tax-to-GDP ratios between 2018 and 2019 occurred in Nicaragua (a rise of 2.7 percentage points [p.p.]), Belize (2.2 p.p.) and the Bahamas (2.1 p.p.). Looking at the different sub-regions, the Caribbean’s average tax-to-GDP ratio rose by 0.8 p.p. between 2018 and 2019 to 24.9 percent, while South America’s declined by 0.1 p.p. (to 22.9 percent) and the tax-to-GDP ratio of Central America and Mexico increased by 0.2 p.p. (to 21.3 percent). The report details how tax reforms in countries such as Nicaragua and Bahamas have been an important driver of the positive trends. Meanwhile, in all countries where tax-to-GDP ratios went down between 2018 and 2019, the decline did not exceed 1 percent of GDP.
According to a special feature in the report examining the fiscal policy responses to the COVID-19 pandemic, tax revenues declined sharply during the first half of 2020 amid a collapse in domestic demand, but showed signs of recovery in the second half of the year. Countries expanded social protection provisions, provided direct support to firms, deferred tax payments and established programmes to ease tax liabilities. Meanwhile, latest estimates indicate that total tax revenues in 18 countries across the region declined by 11.2 percent on average in 2020 from 2019. External public debt rose over the same period and will need co-ordinated management over the period ahead.
The report’s second special feature examines the performance of hydrocarbon and mining revenues in 2019 and 2020. It shows that hydrocarbon revenues in major regional producers rose from 2.5 percent of GDP on average in 2018 to 2.7 percent in 2019, driven by one-off extraordinary receipts. Mining revenues in major producers contracted very slightly over the same period to 0.37 percent of GDP. Preliminary data show that fiscal revenues from non-renewable natural resources fell sharply in 2020, mainly due to sharp declines in oil prices and the effect of COVID-19 tax relief measures on corporate income tax payments in the mining sector.
The report explains how fiscal policy – and tax policy in particular – will play an essential role in ensuring the LAC region builds back better from COVID-19, while also addressing social vulnerabilities and weaknesses in productive capabilities that pre-dated the pandemic. Once the recovery is well under way, countries in the LAC region need to promote tax and spending policies that will underpin inclusive and sustainable economic growth.
There is scope to increase revenues from personal incomes taxes (PIT) and environmentally related taxes, as well as social security contributions (SSC) in most countries. PIT and SSC generated 9.2 percent and 17.1 percent of total tax revenues in 2019 respectively, compared with 23.5 percent and 25.7 percent in the OECD (2018 figure). Meanwhile, environmentally related tax revenues amounted to 1.2 percent of GDP on average in 2019 in the 25 LAC countries for which data are available, below the OECD average of 2.1 percent.
Revenue Statistics in Latin America and the Caribbean 2021 is a joint publication by the Inter-American Centre of Tax Administrations (CIAT), the Economic Commission for Latin America and the Caribbean (ECLAC), the Inter-American Development Bank (IDB), the Organisation for Economic Co-operation and Development (OECD) Centre for Tax Policy and Administration and the OECD Development Centre. This is the tenth edition in the series and the third produced through the European Union’s Regional Facility for Development in Transition for Latin America and the Caribbean.