Fiscal Questions Front and Center
El Salvador faces significant challenges for economic policy. In the short-term, fiscal sustainability requires immediate attention. The political debate is overshadowing fundamental discrepancies over the economic and social model. An economic, social and political pact is necessary to redefine the role of the state, and to develop policy that will reinvigorate investment. Our outlook for 2016 and 2017 calls for changes in fiscal conduct, just enough to avoid a payments crisis, and to buy time to develop long-term solutions.
We anticipate few changes in current trends: economic growth should remain modest, and insufficient to reduce unemployment; more exports and foreign remittances are expected, without a reinvigoration of foreign investment; fiscal figures are likely to reflect just the managing of transition (for negotiations, and adopting economic policies); and prices and interest rates will keep gradually rising.
Fiscal issues comprised a significant part of the political and economic agenda in August and September, in both Guatemala and Costa Rica, with both countries needing to increase revenues. However, their reasons differ. For Guatemala, the need for higher revenues goes hand-in-hand to the need to increase spending to improve human capital, and increase growth potential. For Costa Rica, it accompanies an urgency to cut the fiscal deficit, and to achieve fiscal sustainability.In Guatemala, the public debt-to-GDP ratio has been stable, at 25%; but in Costa Rica, the central government’s GDP ratio has been growing; without significant reform, it could rise to around 50% by next year.
In Guatemala, several recent events have raised the fiscal performance issue. First, President Jimmy Morales withdrew the fiscal proposal his government submitted to Congress in August. Second, the IMF argued that the country needs a higher tax burden if it wants to achieve better competitiveness and development. Third, the 2017 budget proposal was presented to Congress with an estimated deficit-to-GDP ratio of 2.2%, above the estimated 1.6% ratio for 2016.
In Costa Rica, the central government has been making progress in managing its short-term fiscal situation.The primary and financial deficits for the first eight months of the year fell, due to good revenue collection and relatively tight spending. Congress also quickly approved a proposal to fight fiscal fraud, increasing penalties and giving tax administrators tools to better oversee tax compliance. But the substantive fiscal agenda, related to taxes and expenditure cuts, will navigate in turbulent waters as campaign season approaches, and the 2017 budget proposal is relatively expansionary.
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