He Committee of Experts of the Ministry of Economy and Finance (MEF) put forward a series of proposals to improve the fiscal institutionality, after maintaining compliance with the rule for four consecutive years, which led to Uruguay to have the risk country lowest in the region.
Greater autonomy for the Fiscal Advisory Council (CFA), as well as maintaining a level of debt prudent are some of the axes of the 2023 Fiscal Report published this Thursday, which analyzes the path taken and calls for “a process of continuous improvement.”
A prudent level of debt
The experts pointed out that “the sustainability of public debt is the anchor of the “fiscal rule” and they admitted that the current level is in line with the median of countries that are in the same risk category (BBB).
“We must delve into the prudent level of debt to achieve in stabilizing debt in relation to product. The debt ratio in terms of GDP It is influenced by the cyclical GDP in its denominator and, therefore, it can be affected, temporarily, by deviations in the GDP gap exogenous to the management of the fiscal policy”, they warned.
In this sense, they indicated that the MEF “is analyzing this aspect to Uruguay, purifying the debt quotient by the GDP gap and, likewise, by the changes registered in relative prices over the last decades.”
“When this analysis has matured, we will be in a better position to move towards estimating a prudent level of debt and, therefore, the taxes workout necessary to reach, or maintain, said levels over time,” they proposed in that sense.
A cap on spending
In the report they indicated that some fiscal rules “incorporate limits on current expenditure, prioritizing investment spending, which usually has a greater fiscal multiplier and impact on potential future growth.” “More recently, debate has arisen about whether or not to incorporate incentives for environmental public spending into fiscal rules,” the specialists stated.
And they warned: “Although possible benefits are recognized in these mechanisms for more mature stages of the fiscal rule, in early stages such as those existing in our country, we sought to prioritize the central objective associated with the sustainability of public debt, avoiding the imposition of multiple objectives.
Autonomy for the Fiscal Advisory Council
On the other hand, the report indicated that “fiscal rules are strengthened by having external fiscal councils independent and autonomous Therefore, they proposed that “in a second stage of fiscal institutionality, it would be advisable to provide greater autonomy to the CFA.”
Regarding the scope of this benefit, they asked that it be “both at the budgetary as in matters of expansion of roles”, and then request that it be enabled to “provide an opinion on aspects related to the fiscal sustainability of the debt and the reasonableness of the official macroeconomic assumptions implicit in the fiscal estimates, among others.”
Alternative methodologies and anti-diversion mechanisms
On the other hand, they pointed out that “there are alternative methodologies to estimate the Potential GDP”, pointing out that, in addition to the HP filter used by the MEF, others could be implemented that would promote “a more procyclical fiscal policy.”
At the same time, they considered it “reasonable” that in the face of potential detours of the fiscal rule can “identify mechanisms to correct them”, something that they indicated as “particularly relevant to deviations in the trajectory of the debt ratio.”
“The mechanisms for correcting deviations may involve fiscal policy actions or, in the event that the deviation occurs due to unexpected increases in the GDP gap, simply the signaling of the expected correction over time,” the experts proposed.
Fiscal perimeter, compatibility and better communication
Another axis was to establish a definition of the fiscal perimeter, which calls for including organizations outside the Central Administration and the state entities included in article 220 of the Constitution.
“It could be pertinent in the future as long as legal aspects can be corrected – such as the autonomies or areas of law that apply to them – and accounting aspects since it is a necessary condition that there is a single accounting between the current perimeter considered and any other organism that is intended to be included in the future,” the report stated.
Likewise, he mentioned the “compatibility of the fiscal rule with laws that provide for the existence of freely available funds, which are income of certain state organizations that are obtained outside the budget national”. “However, the use of said funds falls within the coverage of the fiscal rule. For the future, it is necessary to find a mechanism for consistency in the use of these funds with the new fiscal institutions,” they concluded.
Finally, the experts focused on the communication, by describing that “it is key when it comes to conveying to citizens the benefits of preserving the sustainability of public debt, while being able to be accountable for fiscal management.”
For this reason, they reported an agreement with the Central Bank of Uruguay (BCU) establish “a permanent space on Fiscal Institutionality in the Economics Conferences held annually in said institution, to communicate and debate these central aspects of the country’s economic policy.”
Source: Ambito
