Fiscal Policy and Public Debt Eugenia Correa

Economics Faculty, UNAM

12th International Post Keynesian ConferenceKansas City, Missouri

September 25–28, 2014

Financial Markets doing their job ? (FT-4-09-2014)

Key Ideas on LAC-Fiscal Policy at the WC

• Stabilization through Fiscal Consolidation as a condition for Growth;

• Which means, abandoning fiscal stimulus policies• Increase in public debt in local currencies• Privatizations• Decentralization• Reduction and focus of Subsidies• Increased Tax revenue by VAT

Key ideas in Fiscal Policy for LAC, today

• Fiscal discipline to avoid volatility, high inflation and devaluations that marked the 1980s and 1990s. (IMF, WB, OCDE, etc)

• Moderate Fiscal Stimulus during a prolonged slump (debates about its size and duration)

• Created strong ceiling (fiscal superavit, descend public debt in local currency) during growth periods, for eventual stimulus in long slump

• The conventional view is still that expansionary fiscal policy could stimulate the economy,

• Country risk rating based on sound fiscal policies

How Have Fiscal Policies Evolved?

• Privatization and PPP• Capital and Income Concentration• For developing countries, also: • - no BC loans to Government• - growing rent transfers• - dollarization (total or partial) / off-shore

credit circuit• - Fiscal consolidation and Austericy Policies• - Changes in Financial Structures: decline of

Public Banks.

WC vs Now

• Stabilization Policies• Reduction of Expenditure,

except for debt service • (Temporary) Increase in

revenues, by privatizations and non-income taxes

• Only sound fiscal policies can improve a country´s rating - linked to the interest rates of private foreing debt

• Long term Sustainability of public accounts

• Transparency of public accounts• Privatization of Public Services

and parts of public administration• Goverment Debt Ceiling• Privatization in Education and

Health • Only responsable fiscal policies

can improve the rating, call contry risk. That was no-linked to the interest rates of private foreing debt

LET US SEE WHAT HAPPEN WITH THE SO CALL “PINK” COUNTRIES

LAC comprise a large region, with different pasts and institutions, so

Debate:

• Some South America governments in 00s abandoned Neoliberal Policies towards Growth with Stable Public Policies. (Argentina, Bolivia, Brazil, Ecuador, Paraguay, Uruguay and Venezuela)

• Those governments called “Pink South America’ countries” have moved away from IMF policy supervision. Which means less fiscal policy constraints?

• Lets take a look …

Economic Growth

LAc out-WC GovernmentsGDP per capita

2003-2013Argentina 5.9Bolivia 2.8Brazil 2.5Ecuador 3.6Paraguay 3.1Uruguay 5.8Venezuela 2.9

Source: Cepal, Balance Preliminar, several years.

Less Inequality ?

But, Less Poverty

Declining Public Debt

2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

20

40

60

80

100

120

140

Central Government Gross Debt (as % GDP)

Argentina Bolivia Brazil Ecuador Paraguay Uruguay Venezuela LAC

Surplus Primary Balance - Public Sector

Surplus of General Balance before Crisis

Resilience in Public Budget

LA Pink GovernmentsPublic Sector Interest Payments as % of Central Government Income

2003 2004 2005 2006 2007 2008 2009 2010 2011Argentina 15 10 14 12 13 13 13 7 9Bolivia 13 12 11 7 5 3 5 5 5Brazil 41 31 32 30 27 23 23 14 17Ecuador 17 15 13 13 10 5 3 4 4Paraguay nd nd nd nd 6 4 4 2 1Uruguay 28 23 21 20 18 14 14 11 11Venezuela 22 16 11 7 6 6 7 7 11Source: Cepal, Anuario Estadístico 2011

2010 and 2011 are Central Government

Preliminary Conclusions

• Even “pink” countries, haven´t recovered sovereignty in fiscal policies.

• External debt: strong renegociation gave more fiscal space for Argentina, as the previous default crashed debt ratings

• Weak Fiscal Policies also mean Weak National States and Growing Ingovernability.

• This also brings greater corruption and social violence?• International credit markets still impose macroeconomic

conditions and therefore government economic policies• The political ideologies of the ´pink governments´ are left

unfillfilled in economic terms.

Inequality limits growth, but can even tip the system?

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