Fiscal Policy, Stabilization, and Growth: Prudence or Abstinence?

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Guillermo E. Perry, Luis Serv n, Rodrigo Suesc n
World Bank Publications, Oct 19, 2007 - Business & Economics - 350 pages
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Fiscal policy in Latin America has been guided primarily by short-term liquidity targets whose observance was taken as the main exponent of fiscal prudence, with attention focused almost exclusively on the levels of public debt and the cash deficit. Very little attention was paid to the effects of fiscal policy on growth and on macroeconomic volatility over the cycle. Important issues such as the composition of public expenditures (and its effects on growth), the ability of fiscal policy to stabilize cyclical fluctuations, and the currency composition of public debt were largely neglected. As a result, fiscal policy has often amplified cyclical volatility and dampened growth. 'Fiscal Policy, Stabilization, and Growth' explores the conduct of fiscal policy in Latin America and its consequences for macroeconomic stability and long-term growth. In particular, the book highlights the procyclical and anti-investment biases embedded in the region's fiscal policies, explores their causes and macroeconomic consequences, and asesses their possible solutions.
 

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Page 243 - The fiscal rules are: • the golden rule: over the economic cycle, the Government will borrow only to invest and not to fund current spending; and • the sustainable investment rule: public sector net debt as a proportion of GDP will be held over the economic cycle at a stable and prudent level.
Page v - Haber, AA and Jeanne Welch Milligan Professor, Department of Political Science, Stanford University; Peter and Helen Bing Senior Fellow, the Hoover Institution Eduardo Lora, Principal Adviser, Research Department, Inter-American Development Bank Jose Luis Machinea, Executive Secretary, Economic Commission for Latin America and the Caribbean, United Nations Guillermo E. Perry, Chief Economist, Latin America and...
Page 152 - ... budget constraint in subnational finances in Argentina. Brazil: Repeated rescheduling. No hard budget constraint for the states. A state debt crisis was not the main macroeconomic problem that observers expected from decentralization in Brazil. They feared that the large increase in tax sharing mandated by the 1988 constitution would provoke federal deficits, because the federal government would not cut its ordinary (non-transfer) expenditures or raise federal taxes by an equivalent amount. Nevertheless,...
Page xix - Fund for Stabilization, Social and Productive Investment, and Reduction of Public Debt (FEIREP).
Page v - ... disseminate information and analysis and convey the excitement and complexity of the most topical issues in economic and social development in Latin America and the Caribbean. It is sponsored by the Inter-American Development Bank, the United Nations Economic Commission for Latin America and the Caribbean, and the World Bank. The manuscripts chosen for publication represent the highest quality in each institution's research and activity output and have been selected for their relevance to the...
Page 152 - Second, it constrained the provinces' ability to borrow from their own banks by eliminating their access to the central bank rediscount facility and tightening bank regulation. After the 1994-95 economic shock, most provinces had to recapitalize or privatize their banks, rather than being able to borrow from them.
Page 241 - ... norm. 2004 Medium-Term Objectives • Balanced central government finances in structural terms by 2007. • Central government expenditure (excluding interest payments, unemployment benefits, and a few other items) is subject to a cap over the period 2004 to 2007. 2002 Domestic Stability Pact • Golden rule: the budgeted deficit of the federal government must not exceed federal investment spending. Most lander constitutions have a similar law. • Both the central government and subnational...
Page 117 - ... in the fields of elementary education, secondary education, and vocational training, the latter mainly industrial training. In each of these fields, the central activity has been the training of teachers. Cooperative education programs have been in effect at various times during the last 6 years in Bolivia, Brazil, Chile, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Nicaragua, Panama, Paraguay, and Peru, and are now in operation in 7 countries — Bolivia,...
Page 153 - Brazilian stabilization program of 1994, the most successful to date, left unchanged many rules and institutions that motivated the states to let their debt grow. Most of this debt was owed to the central government or to state banks, and up until the debtrescheduling agreements in 1998, much of it was not being serviced by the states. Interest was being capitalized. Thus...
Page 240 - ... legislated numerical rules. The charter requires the government to spell out objectives and targets but places no constraints on their nature. 2000 Domestic Stability Pact Law • Negotiated floors on the budget balance for each government level (a surplus of 0.75 percent of GDP for the lander and zero for municipalities, and the federal government balance should be such that the Stability Programme target is met). Outcomes are assessed by an independent auditor. The law embodies financial sanctions...

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