The impact of the global crisis and the measures adopted to mitigate it left limited “fiscal space” for governments in the region to implement measures for stabilization and compensation of the most vulnerable population, said Juan Pablo Jiménez, Economic Affairs Officer of ECLAC’s Economic Development Division.

Jiménez participated in the XXII Regional Seminar on Fiscal Policy held at ECLAC headquarters from January 26-29, along with authorities and experts from the region and international bodies such as the International Monetary Fund, the World Bank and the Organization for Economic Cooperation and Development.

In his presentation, Jiménez outlined the different ways countries in the region were affected by the crisis, how they addressed its consequences and the space now available to overcome the crisis in a sustainable manner.

Once the crisis hit, fiscal revenues took a steep drop in almost every country in the region - in some cases, by over 6% of GDP – either due to diminishing income from natural resource-based exports, decreasing economic activity or countercyclical measures such as income tax cuts, he said.

This scenario revealed the extent to which government revenues were exposed to the crisis, particularly in countries that are highly dependent on income from natural resource exports.

“The main differencing criteria regarding the exposure of tax systems to the crisis is between countries that rely on the sale of primary goods for fiscal revenues and those lacking abundant natural resources that depend more on domestic economic activity for revenues,” stated Jiménez.

Practically all of the countries in the region adopted measures of different sorts to address the crisis, increasing public expenditure and their level of indebtedness. These measures included support for small and medium-sized companies and agriculture, investment in infrastructure and housing, reductions in personal income tax or corporate taxes and direct subsidies to impoverished families or consumption.

Jiménez classified countries in the region in three groups in terms of public expenditure on these measures:

• Countries that increased spending on programs to mitigate the effects of the crisis (for example, Chile, Brazil, Argentina and Costa Rica)

• Countries that maintained the same levels of spending because their declining revenues and lack of financing postponed implementation of countercyclical measures (basically Central American nations)

• Countries highly dependent on natural resources that had to drastically reduce public expenditure (for example, Venezuela and Ecuador)

There are also significant differences in countries’ level of indebtedness. In Chile, for example, the public debt as a percentage of GDP is less than 10%, while in Guyana it is 128%. Average indebtedness in Latin America is 28% of GDP, but in the Caribbean it reaches 85%, raising concerns about the subregion’s sustainability.

The crisis interrupted a six-year period of economic growth during which countries in the region to some extent or another reduced their public debt, increased reserves and improved their social indicators, leaving them in a better position to face the crisis than in prior occasions.

“However, the greater demand for government intervention coincided with a widening gap between fiscal resources and growing demands for public spending,” said Jiménez. “As a result, there are big challenges ahead if countries want to strengthen the capacity of their public sector in order to address critical periods as well as respond to multiple existing demands.”

The possibility of governments to implement countercyclical actions is linked not so much to the need to carry them out as the capacity to finance them.

The different capacities and maneuvering room governments have to regain stability and gradually improve their social indicators (which, according to prior experiences, could take twice as long as recovering economic indicators) seem to be twofold, according to Jiménez.

“In countries specialized in natural resources, these different capacities have to do with how they dealt with the higher public revenues brought by the commodity price boom,” he explained.

“But in countries that have experienced declining terms of trade and high poverty levels, the consequences of the crisis and the need to address it through countercyclical policies have revealed the limitations of the public sector to respond to the population’s needs, not only due to institutional weaknesses but also to very low tax burdens,” added Jiménez.