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Fiscal Reform Needed In LATAM, Caribbean, IDB Says

by Mike Godfrey,, Washington

13 April 2016

Major fiscal reforms are needed in Latin America and the Caribbean due to pressures such as weak global growth and lower commodity prices, according to a report from the Inter-American Development Bank (IDB).

The report, entitled Time to Act: Latin America and the Caribbean Facing Strong Challenges, analyzed announced fiscal budgets of 15 countries. It highlighted fiscal reforms in four countries – Jamaica, Honduras, Mexico and Chile – that it said "promote sustainability over the longer term."

However, the report said that countries in the region need to conduct a comprehensive review of fiscal policies that considers wider actions on both spending and taxation.

Given very low international oil prices, taxes could be levied on gasoline in domestic markets so that low prices are not fully passed on to consumers, the report said. Such a measure could produce substantial fiscal revenues, and may also be justified for energy efficiency and environmental reasons, it added.

The report also noted that tax expenditures (through exemptions and incentives) amount to about four percent of gross domestic product (GDP) on average in the region, and in many cases those expenditures may be reduced without affecting output growth.

There is also ample room for countries to improve tax administration to reduce tax evasion and smuggling through the implementation of full-fledged electronic invoicing for value-added taxes, the IDB said.

The reduction in commodity prices contributed to lower proceeds across those countries reliant on non-renewable commodities for fiscal revenues, the report found. On average, commodity related revenues fell by almost four percent of GDP from 2011 to 2015. In contrast, fiscal revenues gained ground in oil-importing countries, particularly across Central America and the Caribbean. Economic growth rose to 2.9 percent on average for these countries, which allowed fiscal revenues to increase by almost 0.5 percent of GDP in 2015.

"Fiscal adjustments are never easy," said IDB Vice President Santiago Levy. "Many countries are in the difficult position of having to act now or face more painful adjustments later on. The good news is that there is room to increase spending efficiency and rebalance fiscal policy to improve growth and protect the many social gains that have been achieved over the past decade."

TAGS: environment | tax | value added tax (VAT) | Chile | fiscal policy | energy | gross domestic product (GDP) | budget | Jamaica | Mexico | environmental tax | tax reform | Honduras | Central America | Tax

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