Increased social spending in Latin America requires more tax revenue and efficiency

(La Paz, October 1, 2012.) - In recent years social spending by the public sector has increased in the countries of the region, so it is now necessary to generate higher levels of revenue, efficiency, control and transparency in the allocation of resources to provide an equitable increase in the quantity and quality of public goods in the areas of defense, security, education, health and infrastructure, together with the other specific needs of each nation.

This is one of the main conclusions of the latest Report on Economy and Development (RED) that CAF - development bank of Latin America - recently presented in La Paz. The paper is entitled Public finance for development: strengthening the connection between revenue and expenditure.

The launch event was attended by Luis Arce, Bolivian minister of Economy and Public Finance; Edwin Rojas, vice minister of Treasury and Public Credit; and the authors of the publication Pablo Sanguinetti and Daniel Ortega, director and senior executive of Socioeconomic Research at CAF; along with recognized national and international economic analysts.

The report offers arguments and evidence on the key role of public finance in promoting equitable development and shows how the participation of States is essential in this process.

Minister Luis Arce said the Report was important, useful and necessary, primarily for economic policymakers, because it gives them the tools to broaden criteria and maintain an internal debate. He said the document was a good contribution to a very important area for Bolivia, a country that has gone through a fiscal policy revolution.

He highlighted the indicators on the state of public finances. "It is important to analyze if there is a good income distribution, if fiscal policy is equitable, if the State is fulfilling its role of balancing the many needs that exist, and if the needs of all sectors are being reasonably met," he said.

CAF representative in Bolivia Emilio Uquillas said the document was prepared thinking about the future of the region and as a contribution to the knowledge and decision-making process of economic policymakers.

"Starting now, we feel there is work to be done; the role of finance ministries and central banks should now be seen from another perspective. Countries are no longer what they were, we have potential resources and we have to strengthen institutions, think about education for tax culture and begin to insist on much stronger accountability of governments; more specifically, we have to change the geography and social organization of our countries," he said.

Pablo Sanguinetti said "to make public services effective, modern states have moved beyond the allocative function and are assuming an increasingly important role in improving income distribution." In this context the eighth edition of RED emphasizes the need to strengthen taxes and spending decisions and make them more transparent.

Throughout the report, aspects of the working of taxation systems in the region are identified which could interfere with the connection between income and spending. These include the existence of unbalanced tax structures, high levels of evasion which make tax systems very unequal; and social spending programs that are inefficient and have very limited capacity for redistribution.

Seminar

Sanguinetti began his presentation with a summary of the fiscal diagnosis of Latin American countries, noting that in the last 20 years the region’s spending as a percentage of GDP has grown by three points due to transfers to low-income families and increased investment in security and education.

The States have to take decisions to finance spending and improve distribution, for which it is necessary to define the structure of direct or indirect taxes, and another control structure to guarantee collection, he added.

Ortega referred to the poll taken by CAF in 17 countries of the region. The results show that most people would be willing to pay taxes if they could see that the resources were being well used and the public sector was more efficient. In Bolivia - in the cities of La Paz and Santa Cruz - a high percentage of citizens, above the regional average, think this way.

Comments

The guest speakers invited to review and comment on the work of the economists were: José Antonio Ocampo of Colombia (professor at Columbia University), and Bolivians Horst Grebe (president of the PRISMA Institute), George Gray (coordinator of the UN Development Program, UNDP), and Gabriel Loza (independent consultant, former minister of State and former president of the Central Bank of Bolivia). All spoke positively of the efforts and interesting results of the work.

Ocampo said increased public sector spending in the countries of the region was more of a recovery following the contraction of recent years. When analyzing the issue of spending and revenue it is important to differentiate social spending from what is now social assistance, which is taking place in some countries.

Grebe commended the contribution that CAF was making with the RED reports. On this latest edition, he noted the contribution to the Bolivian public agenda going forward "when fiscal slack and the external boom end" and thoughts have to turn to deep tax reform, the financial sustainability of benefits and subsidies, and the fiscal pact beyond redistribution - between the central State, provinces and municipalities - of the revenue that comes from taxes on natural resources.

George Gray recommended taking into account the political economy, which considers the existence of beneficiaries and excluded in every social spending and tax program, situation that has to be assimilated when the decision is made to expand the tax base, shift from indirect to direct taxes, and target spending on the most needy.

Lastly, Gabriel Loza called the theme chosen for the CAF report provocative and inspiring. He praised the work for providing an external comparative view of the tax system in the region, but suggested more depth was needed in cases like Bolivia and other Latin American countries where social pressure and conflict is also present, and important structural changes have been made in the areas of revenue from natural resources and the relation between citizens and the State.

The publication is available at www.caf.com .