Report on Latin American public finances and their impact on development

(Lima, Sept. 4, 2012).- CAF –development bank of Latin America–presented today the eighth Economy and Development Report (RED, by its Spanish acronym) entitled “Public finance for development: Strengthening the connection between revenue and expenses,” which provides arguments and evidence on public finances’ central role in promoting equitable development.

The report was presented by Peruvian Economy Vice Minister Laura Calderón, CAF Country Director in Peru Eleonora Silva and CAF Social and Economic Research Director Pablo Sanguinetti.

Calderón said RED is a content-rich report not only from an academic point of view but also in terms of practical value, by shedding light on challenges faced by fiscal policy decision makers, as it seeks to address questions on the options they have.

Silva said the 2012 RED report stresses the strong interdependence between revenue and expense decisions, as well as the manner in which this connection could generate a virtuous circle leading to bigger revenue, which in turn would help provide more and higher quality public goods and services.

Silva said the report points to the need of increasing the transparency on tax-related decisions, as well as their efficiency and quality. She expressed hope that the fiscal system’s study and analysis, contained in the publication, will encourage a debate on fiscal decentralization and public expense.

“Promoting a profound knowledge of the region, an in-depth look into problems affecting our countries and providing possible solutions is CAF’s contribution to development processes in Latin America, as an institution that accompanies the region in its development strategies, not only with financing but also with knowledge and technical support,” concluded the multilateral bank’s representative in Peru.

Sanguinetti indicated that the survey used to prepare RED 2012 reveals that three quarters of the population in the analyzed cities believe that paying taxes in accordance with the law gives the citizen a bigger right to demand better quality management from officials. This makes stronger links between revenue and expenses more necessary.

He also mentioned that throughout the report there are references to different aspects on the fiscal system’s functioning, which could hinder the revenue and expense connection. Those aspects include poorly balanced tax structures, with a low income tax share and high tax evasion rates, resulting in a very unequal tax system, little efficiency and redistribution capacity for social expense programs.

“Latin American countries face the need to provide economic infrastructure and social programs with the goal of strengthening the economic growth process with equity,” Sanguinetti said. “That calls not only for more efficient resource use, but also for an increase in state revenues.”

Even though Latin America has made progress in terms of resource distribution, Sanguinetti said in his concluding remarks, an effective and sustainable redistribution needs to be underpinned by two key factors: the creation of real opportunities through quality investments in training human capital; and an inclusive welfare state that treats all citizens fairly in the contract between citizen and state, by eliminating informal labor.

To see the 2012 RED Report download the PDF version, please visit: http://publicaciones.caf.com/publicacion?id=1545