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Fiscal Panorama of Latin America and the Caribbean
Tax policies for resource mobilization in the framework of the 2030 Agenda for Sustainable Development
Foreword
Fiscal consolidation continued in Latin America and the Caribbean in 2018. The primary deficit for the Latin American countries as a group came down from 0.8% of GDP in 2017 to 0.5% in 2018, mainly as a result of cuts in primary spending –total expenditure before interest payments– which fell from 19.0% of GDP in 2017 to 18.6% in 2018. In the Caribbean, the overall primary surplus rose from 0.9% of GDP in 2017 to 2.1% in 2018, reflecting the need to continue to generate substantial primary surpluses to stabilize and reduce high public debt levels.
Despite the improvement in the fiscal position in Latin America, its gross public debt is rising, and reached 42.3% of GDP in 2018 compared with 39.4% the previous year. This rise is chiefly a reflection of gross public debt in Argentina, which climbed by 38 GDP percentage points between 2017 and the third quarter of 2018, to reach 95.4%. By contrast, Caribbean gross public debt levels levels, though still high, dropped between 2017 and 2018, from 74.3% of GDP to 72.4%.
The region’s fiscal consolidation efforts have shrunk the growth contribution of public expenditure. Capital spending in Latin America fell from 3.6% of GDP in 2017 to 3.2% of GDP in 2018, the lowest level since 2007. South America also saw a fall in primary current expenditure, which could put pressure on social spending. In the Caribbean, meanwhile, the decline in interest payments seen in recent years continued in 2018, which opened up some space for balancing the composition of total government expenditure and, in fact, public investment has risen in most of the Caribbean countries.
Government revenues remained at 2017 levels (18.1% of GDP) for Latin America as a whole, but this masked divergent performances, with a downward trend in the group comprising Central America and Mexico, and an upturn in South America. In the Caribbean, an increase in tax revenues and in other income, including citizenship by investment (CBI) programmes, pushed up total revenues to 27.6% of GDP in 2018, from 26.3% in 2017.
Fiscal revenues in the region remain insufficient to finance achievement of the Sustainable Development Goals. One of the main barriers to domestic resource mobilization is the high level of tax evasion and illicit financial flows. The latest estimate by the Economic Commission for Latin America and the Caribbean (ECLAC) suggests that tax evasion and avoidance in Latin America cost 6.3% of GDP in 2017, equivalent to US$ 335 billion. ECLAC also estimates that the Latin American and Caribbean region overall lost US$ 85 billion —or 1.5% of regional GDP—in illicit financial flows as a result of trade misinvoicing in 2016.
At the subnational government level, the region’s most decentralized countries saw a rise in primary and overall deficits in the average figures in 2017, mainly reflecting the subnational fiscal balances in Argentina, Brazil and Mexico. These developments have considerably reduced the fiscal space available to this level of government since 2012, as a result of rising expenditure, limited use of existing subnational tax bases, such as property tax, and growth in public debt. Bearing in mind that in several countries of the region, the responsibility for basic services such as education, health and infrastructure has increasingly been passed to subnational governments, the narrowing of the subnational fiscal space could have an impact on the proper provision of these functions at the level of the consolidated public sector.
Although the past decade brought significant improvements in distribution trends at the regional level, data from the past few years show that the pace of inequality reduction has slowed. In an uncertain macroeconomic context and amid fiscal consolidation, this slowdown requires a fine-tuning of public measures. The region needs stronger tax instruments with more redistributive power —personal income tax collection remains particularly weak— and more efficient and effective public expenditure geared towards well-being outcomes.
In this setting, tax policy has gained traction as a tool to boost progress towards the achievement of the Goals of the 2030 Agenda for Sustainable Development. Domestic resource mobilization is increasingly recognized as endogenous to the development process. The tax policies adopted impact not only the level of resources available, but multiple dimensions of the Sustainable Development Goals, such as inequality, poverty, and the well-being of women, older persons, youth and other vulnerable population groups. The challenges the countries face in this regard represent significant barriers to achieving sustainable and inclusive economic development.
This edition of Fiscal Panorama of Latin America and the Caribbean also examines some elements of tax policy that serve to foster progress towards fulfilment of the 2030 Agenda for Sustainable Development, as well as domestic resource mobilization. Chapter II examines taxation and oversight of the digital economy in the region, highlighting changes to business models and the challenges to tax policy and oversight they entail, since tax systems —designed in an earlier era— have a number of weaknesses that facilitate the erosion of tax revenues. In particular, the chapter reviews the unilateral measures that countries in the region have adopted in an effort to close loopholes for tax avoidance and collect tax on digital economy activities.
Tax policy can also impact on the decisions of different economic actors and discourage certain practices that are considered harmful or undesirable from the perspective of the well-being of society overall. Chapter III reviews the current status of environmental and corrective taxes in terms of their ability to address public health issues in Latin America and the Caribbean. The debate surrounding the use of these tax instruments has intensified recently in the region and a number of countries have adopted measures in line with those implemented in developed countries. This chapter also seeks to contribute to the regional discussion on the use of corrective taxes –particularly those related to the consumption of tobacco in all its forms, alcoholic beverages and, more recently, sugary beverages and other unhealthy foods– to achieve the various targets of the Sustainable Development Goals.
Finally, chapter IV explores the use of fiscal incentives in Latin America. Domestic resource mobilization in these countries is constrained by the existence of numerous tax incentives and preferential tax treatments and the cost of tax expenditures —which act as transfers of public resources through the tax system— is considerable. It is important to analyse tax expenditures as a possible tool that, effectively geared towards investment, could help to achieve the targets proposed in the Sustainable Development Goals. However, the use of this tool needs to be assessed through a cost-benefit analysis, taking into account its interaction with tax policy and public expenditure programmes. Such assessments could determine whether there is justification for establishing or maintaining preferential tax treatment, or whether they should be replaced with other, more efficient and effective measures.
