Getting Spending Right
| Author | Benedict Clements/Christopher Faircloth/Marijn Verhoeven |
| Position | Division Chief and/Economist in the IMF's Western Hemisphere Department |
Latin America needs to reform public spending to make it more efficient, better help the poor, and address infrastructure bottlenecks
Latin America's recent economic performance has been strong. The region is in the midst of its most vigorous expansion since the 1970s, with average growth of more than 5 percent over the past three years. Inflation has also declined to an average of about 5 percent in 2006, and the IMF projects external current account balances to be in surplus in 2007 for the fifth consecutive year. Stronger growth has also helped reduce poverty rates.
Still, there is widespread recognition that more needs to be done to raise growth-which continues to lag the average for developing countries as a whole-and reduce macroeconomic vulnerabilities, including high levels of public debt. Fiscal positions have improved because of rising government revenues, mostly derived from commodity-based receipts. But public debt remains high at 52 percent of GDP (as a weighted average at the end of 2006). As such, a key challenge will be reducing the growth of government spending, which has risen rapidly in recent years and precluded an even deeper reduction in public debt burdens. At the same time, the region suffers from the low quality of its infrastructure and high levels of income inequality. If governments in the region are to reduce spending while improving infrastructure and providing a greater level of services, including to the poor, they must improve the efficiency and equity of public spending.
Public outlays in Latin America (net of interest payments) have drifted upward since the mid- 1990s (see Chart 1). Spending increases have not been continuous, however. Increases were well contained in the early phases of the region's ongoing economic expansion, especially in 2003-04. Since then, however, they have resumed their upward trend, rising in 11 of 17 countries between 2004 and 2006. Real spending grew an average of 7½ percent a year over the past two years but, as a percentage of GDP, grew a moderate 1 percentage point because GDP grew rapidly too.
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Expenditure increases since the mid-1990s have been driven by current spending. Capital outlays have declined in relation to aggregate output and total spending, while social spending has become more prominent in government budgets, especially for education and social insurance. Between 1995 and 2004, for...
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