Fiscal policy reform in emerging economies: experiences from LAC

European CommissionImplementation of tax reforms in developing countriesBrussels - May 16th, 2014

Fiscal policy in emerging and developing economiesSome experiences from Latin America

Ángel Melguizo

Head, Americas Desk

OECD Development Centre

2


Making fiscal reform happen in developing and emerging economies

• Diagnostic and design• Implementation• Approval

3

Fiscal policy in emerging and developing economiesA conceptual framework

Tax policy cannot be analyzed separately from expenditures

• Budget constraint• Political economy: willingness to pay higher taxes vs. perceived public services

Main approaches

• Tax-benefit analysis : • How fiscal policy affects households’ incomes?• How fiscal policy is perceived by citizens?

• Macro-analysis (e.g. infrastructure and fiscal policy)

4




5

Diagnostic and design: good tax data is needed…

Tax revenue over GDP

Source: OECD-ECLAC-CIAT (2014), Revenue Statistics in Latin America 1990-2012

Tax revenues over GDP in LAC have been converging to OECD levels since 1990…

0

5

10

15

20

25

30

35

40

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Difference (A-B) LAC (A) OECD(34) (B)

6


Tax revenues(%GDP, 2012)


… but there are significant differences in terms of composition, and among Latin American economies

Tax structure(%GDP, 2012)

0 10 20 30 40

OECD (34)

LAC (18)

Guatemala

Dominican Republic

Venezuela

El Salvador

Honduras

Paraguay

Peru

Panama

Nicaragua

Colombia

Mexico

Ecuador

Chile

Costa Rica

Bolivia

Uruguay

Brazil

Argentina

25.4

16.9

33.8

17.7

6.2

Impuestos sobre la renta y las utilidades Contribuciones a la seguridad social

Impuestos generales sobre el consumo Impuestos específicos sobre el consumo

Otros impuestos

33.5

26.2

20.3

10.7

9.3

AL (18) OCDE (34)

7



Statistics should take into account the regional specificities (e.g. commodities, social insurance schemes, federalism)

0 20 40 60 80 100

Bolivia (E.P.)

Peru

Chile

Ecuador

Argentina

Colombia

Venezuela (R.B.)

Brasil

México 7.7

12.2

3.3

3.1

14.7

2.8

4.4

9.8

2.2

%GDP

PEMEX

Fiscal revenues from non-renewable resources (billion USD and %GDP)

Diagnostic and design: … coupled with good analysis

8

Source: OECD (2008), Latin American Economic Outlook 2009

Inequality in Latin America and the OECD(Gini indexes before and after taxes and public spending)

0

10

20

30

40

50

60

Arge

ntina

Braz

il

Chile

Colo

mbi

a

Mex

ico Peru

Denm

ark

Finlan

d

Fran

ce

Germ

any

Gree

ce

Irelan

d

Italy

Neth

erlan

ds

Polan

d

Portu

gal

Spain

Swed

en

Unite

d Ki

ngdo

m

Inequality before taxes and transfers Inequality after taxes and transfers


9

Source: OECD (2010), Latin American Economic Perspectives 2011. How middle-class in Latin America?

Tax-benefit structure by household income deciles(Percentage of the decile mean disposable income)

Chile Mexico

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

I II III IV V VI VII VIII IX X

Taxes Social spending Net transfers

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

I II III IV V VI VII VIII IX X

Taxes Social spending Net transfers


10

Source: OECD (2011), Latin American Economic Outlook 2012: Transforming the State for Development

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

Arge

ntina

Braz

il

Chile

Colo

mbi

a

Mex

ico

Peru

OEC

D (n

on-L

A)

Market income After taxes and transfers

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

Chile

Mex

ico

OEC

D (n

on-

LA)

Market income

+ Cash transfers

- Income tax

+ Education (in-kind)

+ Health (in-kind)

Inequality in Latin America and the OECD(Gini indexes before and after taxes and public spending)

11




12

Implementation: effectively putting in place a reform demands

• Technical capacity

• Improving fiscal frameworks• Data• Budgeting• Rules• Institutions

13

Implementation: the lack of technical capacity is very costly

PPP renegotiations are the norm in emerging and developing economies, multiplying initial cost estimates

Source: Bitrán, E., S. Nieto-Parra and J.S. Robledo (2013), “Opening the black box of contract renegotiations: an analysis of road concessions in Chile, Colombia and Peru.”, OECD Development Centre Working Paper 317.

Road concession contracts in Latin America (% total cost)

14

Implementation: the role of fiscal frameworks

Fiscal policy tends to be pro-cyclical in Latin America…

URU02

URU03

ARG02

-0.06

-0.04

-0.02

0.00

0.02

0.04

0.06

0.08

-0.25 -0.20 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15

Varia

tion

of c

yclic

ally

adj

uste

d pr

imar

y ba

lanc

e

Output gap

Output gap and variation of adjusted primary budget balance(%GDP)

Source: Daude, C., A. Melguizo and A. Neut (2010), “Fiscal Policy in Latin America: Countercyclical and Sustainable at Last?”, OECD Development Centre Working Paper 291

15


… and very sensitive to the political cycle

Source: Nieto-Parra, S. and J. Santiso (2009), “Revisiting political budget cycles in Latin America”, OECD Development Centre Working Paper 281

P rimary balanc e

-0,8

-0,7

-0,6

-0,5

-0,4

-0,3

-0,2

-0,1

0,0

0,1

OECD Latin America

P rimary ex penditure

-0,1

0,0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

OECD Latin America

Impact of elections on fiscal policy, 1990-2006 (%GDP)

16


Rules seem to be working, at least during the last crisis (e.g. Chile and Peru)

Chile

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Cyclical Commodity related Observed Adjusted

Peru

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Cyclical Commodity related Observed Adjusted

Source: Daude, C., A. Melguizo and A. Neut (2010), “Fiscal policy in Latin America: Countercyclical and sustainable at last?”, OECD Development Centre Working Paper 291

Adjusted primary budget balance(%GDP)

17


Overall, the 2006 round of elections did not impact that much

P rimary balanc e

-1

0

1

2

3

4

5

P rimary ex penditure

-2

-1

0

1

2

3

4

5

Source: Nieto-Parra, S. and J. Santiso (2009), “Revisiting political budget cycles in Latin America”, OECD Development Centre Working Paper 281

Impact of 2006 round of elections on fiscal policy in Latin America (%GDP)

18




19

Approval: citizens’ support is low

Latin America (and most emerging and developing regions) exhibits a low tax morale

Source: Daude, C. and A. Melguizo (2010), “Taxation and more representation? On fiscal policy, social mobility and democracy in Latin America”, OECD Development Centre Working Paper 294

Do you think cheating on taxes is justifiable?

0%

10%

20%

30%

40%

50%

60%

70%

OECD Latin America

Never Justifiable Justifiable

20

Approval: gaining citizens’ support, from the middle

A particularly relevant segment of the population is the emerging middle class…

Attitudes towards democracy

0%

10%

20%

30%

40%

50%

60%

70%

80%

1 2 3 4 5Perceived Income Quintile

Support for democracy Satisfaction with functioning of democracy

Source: OECD (2010), Latin American Economic Perspectives 2011. How middle-class in Latin America?

21

Approval: gaining citizens’ support, from the middle

… but today they conform an unsatisfied majoritySource: OECD (2010), Latin American Economic Perspectives 2011. How middle-class in Latin America?

30

35

40

45

50

55

60

Q1 Q2 Q3 Q4 Q5

"Good Citizens pay their taxes"(percentage of respondents who agree)

25

30

35

40

45

50

Q1 Q2 Q3 Q4 Q5

"Taxes are too high"(percentage of respondents who agree)

25

27

29

31

33

35

37

Q1 Q2 Q3 Q4 Q5

"Tax evasion is never justified"(percentage of respondents who agree)

0

20

40

60

80

100

Q1 Q2 Q3 Q4 Q5

Satisfaction with health services

Satisfied Not satisfied No Access

How middle class is Latin America?

• Risk of downwards mobility

• Outside the social contract (low taxed; critical and not fully benefiting from education or health care services)

22



• Diagnostic and design: Data and sound tax-benefit analysis

• Implementation Technical capacity and favourable fiscal

frameworks

• Approval Tax morale and the social contract

Thank you!

www.oecd.org/dev

Economy & Finance

Fiscal policy reform in emerging economies: experiences from LAC