Introduction

The LAC region has historically been a fiscal basket case. Since the 1970s, debt crises, hyperinflations, and balance of payments crises have recurred, hampering growth prospects and affecting the welfare of low-income households the most. Furthermore, public spending and the tax system are inefficient and regressive, and fiscal policy is procyclical, augmenting the already high macroeconomic volatility.

Although fiscal reforms in the 1990s combined with high growth and rising commodity prices significantly improved fiscal outcomes after 2004, it is not yet clear that a break with the past has occurred. High debt levels persist and, as I shall show in the next section, an important part of the recent increases in revenue are transitory, while increases in expenditures tend to be permanent. This implies that the structural fiscal balance paints a less rosy picture than current figures, and that a downturn in economic activity could lead to a new bout of fiscal solvency problems.

In this chapter I suggest four reforms to improve fiscal outcomes in the region, and attempt a quantification of the potential impact of these reforms based on the recent literature. The proposals are: