SAN SALVADOR, 28 October 2008: Fiscal policy, says the latest Latin American Economic Outlook (LEO 2009) from the OECDs Development Centre, can be a powerful tool for economic, political and social development in Latin America if taxes are raised efficiently and fairly and spending is directed to promoting growth and reducing poverty and inequality.
Fiscal policy – taxing and spending – is part of the political process and should contribute to the consolidation of democracy, the report says. LEO 2009 argues that taxes and public spending can directly attack poverty and inequality, twin problems that continue to beset the region.
Until now, this potential for good has not been realised in Latin America. Current social security spending is failing in its redistributive function. And the quality of basic public goods and services such as health or education neither meets the region’s development needs nor provides a spur to citizens engagement with the state.
Launching the report in San Salvador, OECD Secretary-General Angel Gurría recognised the recent macroeconomic achievements of Latin America but stressed the importance of re-orienting the objectives of fiscal policy towards reducing poverty and inequality in a region with some of the largest socio-economic disparities in the world.
Mr. Gurría highlighted the importance of transforming fiscal policy into a development tool in times of financial and economic uncertainty.
– Fiscal systems which do little to combat poverty and reduce inequalities weaken social support for democratic processes and institutions and fail to empower the people to make the most of globalisation.
Key policy messages of LEO 2009 include recommendations to decouple debt management from politics, to diversify tax sources, to improve the quality of public spending and to simplify tax systems to reduce the burden of informality, one of the key economic challenges of Latin America.
On average, revenues from personal income taxes in Latin American countries amount to the equivalent of only 4 per cent of total tax revenues, compared with approximately 25 per cent in OECD countries.
The total “tax bite” in Latin American countries, measured in terms of the share of Gross Domestic Product (GDP) that is levied by governments through taxation, amounts to only around 23 per cent of GDP, compared with an average in OECD countries of around 42 per cent, while public spending, on the whole range of areas covered by the public budget from education and healthcare to transport infrastructures and defence, averages around 25 per cent, compared with 44 per cent in OECD countries.
(At present, Mexico is the only Latin American country that is a member of OECD, and it is included in both sets of figures. OECD has invited Chile to embark on discussions that are intended to lead to its future membership, but it is not yet a member and is not included in the OECD figures).
Such figures show that Latin America still has plenty to do in terms of fiscal reform. Revenue generation should diversify away from its reliance on non-tax sources and indirect taxes.
And social transfers do not yet play their proper role. Achievements and innovations in the fiscal realm need to translate into sustained policies and lasting institutional reforms. In developed countries, governments have been taxing more and spending more on social benefits to offset the trend towards more inequality. In Latin America, too, governments need to do more to use tax revenues to support social priorities.
Kilde: www.oecd.org
