New Fiscal Social Responsibility Law is approved by the Cabinet and submitted to the Legislative Assembly

PANAMA - In Brief 18 Oct 2024 by Marco Fernandez
On October 14, the Assembly received the proposal for a new fiscal law (LRSF in Spanish). This law is necessary to establish the deficit ceilings before enacting the 2025 budget (which we will comment on in an upcoming report). This new version of the LRSF includes three topics within the same body: (1) fiscal limits and projected future debt ratios; (2) the restructuring of the Fiscal Council (created in 2018, but inoperative so far); and (3) changes to the Panama Savings Fund (FAP). Fiscal Ceilings and Debt Ratios For the first time since its creation in 2008, the new law does not present deficit limits on an annual basis but instead sets a target of 2.5% of nominal GDP in 2027 onwards. The current LRSF mandates a deficit ceiling of 2% of GDP for 2024, which will not be achieved: our estimate is close to 5.5% for this year, a value that coincides with most international analysts. Reason number one for the revision of the Law. The Mulino Government’s first budget re-sent also this week to the legislators (after a revision suggested by the Economics Commission of the Assembly and still under discussion by that Commission) generates a deficit of 3.5% of nominal GDP for 2025, a de facto violation of the existing ceiling. Reason number two for the revision. The key indicator of fiscal discipline (Article 11) is the net debt of the Non-Financial Public Sector (NFPS), with a cap of 50% for ten years and 40% onwards, starting in 2026. “Net” refers to the stock of debt recorded as such minus the FAP equity. This structure qualifies as a “back-loaded” proposal regarding fiscal discipline like the approach taken by previous administrations: laxer initially and becoming more res...

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