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Woodrow Wilson Center – American UniversityWashington, D.C. June 2012
Outline
• Chapter 1: A decade of turbulence• Chapter 2: Fiscal revenues and expenditures:
structure and implications for inequality• Chapter 3: Fiscal revenues and expenditures
evolution • Chapter 4: Fiscal challenges from a political
perspective• Final remarks
A DECADE OF TURBULENCEChapter 1
A decade of turbulence• Three phases of a decade of turbulence: deceleration,
expansion and crisis• The most severe crisis in the last 30 years• Services have become the engine of economic growth,
boost by family remittances, tourism, FDI and exports• However, economic growth was low in labor intensive
sectors• Poverty was reduced slowly (2001-2007) • Due to the severity of the crisis, the achievements
reached in poverty reduction were reversed
Three phases of the decade of turbulence
Costa Rica El Salvador Guatemala Honduras Nicaragua Panamá-1.00.01.02.03.04.05.06.07.08.09.0
2.0 2.03.0
3.7
2.11.4
6.6
3.8
5.0
6.3
4.3
8.3
1.9
-0.2
2.21.6 1.9
4.9
Annual average rate of Economic Growth
(Percentages)
Phase I Phase II Phase IIISource: Icefi, based on official data.
…with the most severe crisis in the last 30 years
Costa Rica El Salvador Guatemala Honduras Nicaragua Panamá (4.0)
(2.0)
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
7.9
3.8
6.3 6.2
3.6
12.1
2.7 1.3
3.3 4.2
2.8
10.1
(1.3) (3.1)
0.5
(2.1) (1.5)
3.2 4.2
1.4 2.8 2.8
4.5
7.5
Annual Rate of Economic Growth (Percentages)
2007 2008 2009 2010Source: Icefi, based on official data.
Services have become the engine of economic growth
Primary Sector Industry Services
0
1
2
3
4
5
6
0.3
0.700000000000001
3.5
0.3 0.41.1
0.5 0.5
2.6
0.5 0.8
2.9
0.700000000000001 0.9
1.5
0.2 0.1
5.7
Contributions to economic growth by economic sector (2000-2009)(Economic growth rate points)
CR SV GT HN NI PASource: Icefi, based on official data.
…boosted by family remittances, tourism, FDI or exports (with different levels of intensity)
CR
PA
GT
NI
HN
SV
0% 20% 40% 60% 80% 100%
Comparision between remittances flows, FDI, exports and tourism (2001-2010)(As a percentage of total flows)
Remittances Tourism Exports FDISource: Icefi, based on official data.
…boosted by family remittances, tourism, FDI or exports (with different levels of intensity)
CR PA GT NI HN SV02468
1012141618
0
10
20
30
40
50
60
70
80Comparison between remittances flows, FDI, exports and tourism (2001-2010)
(As a percentage of GDP)
Remittances Tourism FDI ExportsFuente: Icefi, basada en datos oficiales.
Due to the severity of the crisis, the achievements reached in poverty reduction were reversed
2000 2001 2002 2003 2004 2005 2006 2007 2008 20090
10
20
30
40
50
60
70
Headcount poverty index by lack of consumption or income (2001-2010)(as a percentage of total households or individuals)
GuatemalaNicaraguaPanamáCosta RicaEl SalvadorHonduras
Source: Icefi, based on official data.
1. Complementary role of fiscal and macroeconomic policies– Role of fiscal policy in promoting economic growth– Counter cyclical policy that moderates impacts of
economic shocks– Improve coordination between fiscal and monetary
policy– Big space for cooperation in Central America
• No only economic integration• Regional public goods
The big challenges (1)
FISCAL REVENUES AND EXPENDITURES: STRUCTURE AND ITS IMPLICATIONS FOR INEQUALITY IN THE REGION
Capítulo 2
Structure of fiscal revenues and expenditures: implications for inequality
• Public expenditure is a key tool to reduce inequality– In Central American countries (CAC) exist a relation between lower poverty
and higher levels of public social expenditures– Social expenditures in education and health benefit more the poor in CAC
• Tax system could prevent more inequality and it’s the main source of funds for public expenditure
• The impact of tax system in the income distribution is low because the low collection of direct taxes– Low revenues from Personal Income Tax – High levels of fiscal benefits for a few (like tax exemptions)– High levels of income tax evasion – Almost inexistent real estate taxes
• Fiscal revenues depend mainly on taxation, specially in the lowest fiscal revenues countries in the region (El Salvador, Guatemala)
• A reduced group of countries have diversified its fiscal revenues sources, beyond taxes and grants (Panama, Costa Rica)
• Level and composition of public expenditure have notable differences between Central American Countries
• Allocation of resources to social expenditure was a priority, even on crisis years
• Social expenditure structure– Education and health: the main targets– Social protection: the big difference
Structure of fiscal revenues and expenditures: implications for inequality
Public expenditure is a key tool for inequality reduction
0100
200300
400500
600700
800900
1,0000
10
20
30
40
50
60
70Poverty and per capita public social
expenditure
Per capita public social expenditure (USD 2000)
Indi
vidu
als
or h
ouse
hold
s in
pov
erty
(%)
0 50 100 150 200 250 3000
102030405060708090
100
Completion of elementary education and per capita public spending in
education
Per capita public social expenditure in ed-ucation (2000 USD)
Com
pleti
on o
f pri
mar
y ed
ucati
on (%
)
Source: Icefi, based on official data and ECLAC.
Public expenditure in health and education benefits the poor in Central America
Education(% of public expenditure in education)
Health(% of public expenditure in health)
CR SV GT HN NI PA-10%
0%
10%
20%
30%
40%
50%
60%
Poorest 40% Richest 20%
CR SV GT HN NI PA-10%
0%
10%
20%
30%
40%
50%
60%
Poorest 40% Richest 20%Source: Icefi, based in Barreix, Bes and Roca (2009)
Tax system has a low redistributive impact
CR SV GT HN NI PA (3.0)
(2.0)
(1.0)
-
1.0
2.0
3.0
Gini Index change
<--In
crea
se
D
ecre
ase
->
Ineq
ualt
y
Source: Icefi, based in Barreix, Bes and Roca (2009)
… mainly because of the low collection of direct taxes
Direct taxes participation(% total)
International comparison of tax structure(% GDP)
Source: Icefi, based in official data and Gómez-Sabaini, Jimenez and Podestá (2010).
Direct Indirect Social Contributions0
2
4
6
8
10
12
14
16
18
OECD EU USASoutheast Asia Africa Latin AmericaCentral America
CR SV GT HN NI PA Promedio -
10.0
20.0
30.0
40.0
50.0
60.0
2630
2523
22
51
30
3436
3032 34
51
36
Phase I Phase II Phase III
The redistributive effect of taxes and transfers is much higher in Europe than in Latin America
Source: ECLAC, based on Goñi, López and Serven (2008)
Central America = -3.7%
USA=-16.6%
The low collection of direct taxes is explained by…
• Low revenues from personal income tax• High tax exemptions• High income tax evasion• Others (weak tax administration, political
factors)
Fiscal revenues depend mainly on taxation, especially in countries with the
lowest fiscal revenueFiscal revenues NFPS(% GDP)
HN NI CR PA SV GT -
5.0
10.0
15.0
20.0
25.0
30.0
35.0
29.7 29.5
25.7 24.5
16.8
12.2
Fiscal revenue structure(% total )
PA
CR
NI
HN
SV
GT
0% 20% 40% 60% 80% 100%
Taxes Social Security Other Grants
Source: Icefi, based on official data.
Level and composition of public expenditure has notable differences
Public expenditure NFPS(% GDP)
Public expenditure categories(% total)
Fuente: Icefi, basada en datos oficiales.
CR
SV
GT
HN
NI
PA
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Wages TransfersCapital expenditures InterestGoods and services Others
Allocation of resources to social expenditure was a priority, even on crisis years
Macroeconomic priority(% GDP)
Budget priority(% total public expenditure)
CR SV GT HN NI PA -
5.0
10.0
15.0
20.0
25.0
Phase I Phase II Phase III
CR SV GT HN NI PA -
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
Phase I Phase II Phase IIIFuente: Icefi, basada en datos oficiales.
Social expenditure structure : education and health, main targets; social protection, big difference
CR SV GT HN NI PA0
10
20
30
40
50
60
70
80
90
100
30 26 32
59
32 27
30 32 26
32
3435
2921 19
8
20 27
1 0 3 1 1 2As a percentage of public social expenditure (2001-
2010)
Education Health Social protection Housing Other
Fuente: Icefi, basada en datos oficiales.
2. The challenge of raising more tax revenues remains– Recent progress on direct taxation is important, but still
there is a long way to advance in tax administration, tax evasion, and elusion reduction
– Real estate taxes, a tool to strength local government finances
– Explore fiscal revenues diversification: better management of public enterprises, public assets and other non tax revenues
The big challenges (2)
3. Promote greater equity in public expenditure– Improving level and allocation of social
expenditure, now with institutional strengthening– Face new challenges like climate change and
insecurity– Continuous evaluation of social programs and
infrastructure projects, with better beneficiaries identification
The big challenges (3)
FISCAL REVENUES AND EXPENDITURES EVOLUTION
Capítulo 3
Main findings• Improved fiscal revenues: sustainable?• Public expenditure growth
– Wages and transfers grew during the crisis– Public investment was sacrificed
• Strong relationship between revenues?, fiscal deficit and economic performance– Fiscal revenue highly dependant on imports
• Debt outlook is better than a decade ago: external debt was reduced and created fiscal space to face the crisis
• Three fiscal sustainability scenarios
Improved fiscal revenues: sustainable?
Total Fiscal revenue (2001-2010) (% GDP)
CR ES GT HN NI PA0
5
10
15
20
25
30
35
Phase I Phase II Phase III
Central American average Tax Burden1990-2010 (% GDP)
19901992
19941996
19982000
20022004
20062008
8
9
10
11
12
13
14
15
Source: Icefi, based on official data.
Public expenditure growth: wages and transfers up, investment down
(% GDP)NFPS
I II III
CR 27.7 25.7 29.4
SV 18.1 18.1 20.8
GT 14.2 14.2 14.1
HN 29.2 30.0 34.2
NI 24.6 27.5 31.3
PA 26.0 25.4 26.2
Expenditure change in anti-crisis plansCentral government (% GDP)
Source: Icefi, based on official data.
Wages Transfers Capital Interest-1.5
-1-0.5
00.5
11.5
22.5
33.5
CR SV GT HN NI
Strong relationship between fiscal revenues, fiscal deficit, and economic performance
Deficit (% of GDP)CR SV GT HN NI PA
-5.0-4.5-4.0-3.5-3.0-2.5-2.0-1.5-1.0-0.50.0
I II III
Deficit increase in 2009, according to revenues or expenses
CR ES GT HN NI PA0%
25%
50%
75%
100%
RevenuesSource: Icefi, based on official data.
Strong response of fiscal revenue to business cycle, highly dependant of imports
Fiscal revenue growth Taxes linked to imports
CR SV GT HN NI PA-15
-10
-5
0
5
10
15
II III
CR SV GT HN NI PA10%
15%
20%
25%
30%
35%
40%
45%
50%
2007 2008 2009 2010Source: Icefi, based on official data.
Debt outlook is better than a decade ago: external debt was reduced and created fiscal
space to face the crisis
NFPS
Country 1991-2000 2001-2010
Total Internal External Total Internal External
CR 41.8 26.9 14.9 39.4 24.7 14.7
ES 29.1 8.4 20.7 39.7 12.2 27.5
GT 21.7 6.9 14.9 21.8 8.0 13.8
HN 71.4 2.6 71.2 38.8 4.2 34.6
NI 195.9 195.9 82.0 18.5 65.4
PA 77.0 17.6 59.4 59.6 13.2 46.3Fuente: Icefi, basada en datos oficiales.
Three sustainability scenarios
1. Orthodox Fiscal adjustment– Non viable
2. Financial sustainability– Public sector financing at current level– Gradual and progressive reforms in revenue and expenditure– Fiscal deficits around business cycles (with rules)
3. Sustainability with equality and growth– More fiscal revenues– Transparency– Equality and economic growth
FISCAL CHALLENGES FROM A POLITICAL PERSPECTIVE
Chapter 4
Main findings
• Public sector reforms are very hard to achieve due to political factors
• Key role of Legislative Branch• Tax structure strongly influenced by economic
elites and their State role paradigm• Fiscal reform great challenge: how to make
alliances
Public sector reforms are very hard to achieve due to political factors
Tax reforms are the best example
• Ambitious reforms are very hard to be approved
• Actors’ roles, power shares and interests determine reforms outcomes– State branches– Economic elites– Popular sectors
Proposed and approved reforms (2008-2011)
CR SV GT HN NI PA0
2
4
6
8
10
12
14
16
18
Approved Non aproved
Source: Icefi, based on official data.
Actors, institutions and processes
• Legislative Branch central role– Growing political parties fragmentation– Reform approval more difficult in countries with
more fragmented political parties • Economic elites and their power exercise
– Their influence on State configuration models– Influence on the tax structure– Tax incentives vs. Public expenditure
The great challenge: finding allies
• First pillar: recover citizen trust on public sector– Real and verifiable actions can reduce citizen distrust, via
transparency and anticorruption measures promotion– Campaigning to communicate the results achieved
• Second pillar: allies search– Emergent elites interests– Popular sectors– Look for pro-reform coalitions
Summing upFinal remarks: the big challenges
1. Economic challenges2. The challenge of raising revenues remains3. Promote greater equity in social expenditure (+)4. Political challenges
– Fiscal reforms approval by fragmented legislatives– Influence of economic elites and limited vision on competitiveness
(only demand tax exemptions)– Transnational elites involvement demands incentives and motivations
to distance themselves from traditional opposition and to contribuite State strengthening through fiscal reform
– Prevent clientelistic practices on policies addressed to popular sectors
– Earn medium class trust on State
