Challenges to Fiscal Adjustment in Latin America

Despite considerable progress made by Latin America’s biggest economies in putting their finances in order, numerous challenges remain.  Public spending needs to incorporate more flexibility, ageing populations and social demands threaten future pressures on expenditure, and social and infrastructure spending need to be more cost-effective.  At the same time, tax bases need to broaden to reduce reliance on distortionary taxes on financial transactions and enterprise turnover, and overall tax administration must be improved.  Finally and foremost, the fiscal authorities need to keep public debt at sustainable levels, paving the way for faster, more resilient growth.This volume discusses progress made to date in Argentina, Brazil, Chile and Mexico, and points out the road ahead.  It provides an overview of trends and highlights the diversity of fiscal adjustment processes in Latin American countries.  It also describes the financial market perspective and role of sovereign debt ratings. The chapter on Argentina debunks the view that fiscal management in the 1990s was irresponsible, arguing instead that the financial crisis was caused by a confluence of costly pension reforms, Brady debt restructuring and the recognition of fiscal “skeletons” in the closet. The chapter on Brazil makes a case for a more entrenched culture of fiscal austerity to make the current achievements sustainable.  The Chile chapter describes the role of political cohesiveness following the return of democracy in driving the economy to fiscal rectitude.  Finally, the chapter on Mexico discusses different scenarios for debt dynamics and the country’s efforts to contain expenditure pressures.