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The government raised the fiscal deficit target from 3% to 3.4% of GDP

The government raised the fiscal deficit target from 3% to 3.4% of GDP
The government raised the fiscal deficit target from 3% to 3.4% of GDP

He fiscal deficit It has been one of the biggest problems of the economy in the last stretch of the government headed by Luis Lacalle Pou: after rising to 4.4% in May and worsening for the fourth consecutive month, the Ministry of Economy and Finance (MEF) decided to raise the fiscal target planned for this year.

Behind the recognitions for the “lower taxes and low inflation” that the minister Azucena Arbeleche highlighted the government’s economic management when presenting the latest Accountability on Friday at Parliament, The truth is that this administration will end up with levels of fiscal deficit similar to those he received upon taking office.

This data is one of the most questioned even when the fulfillment of the three pillars of the fiscal goal for four consecutive years. Above all, because the economic authorities have adjusted the target on several occasions in order to achieve it at the end of each year.

In that sense, as can be seen from the Accountability Report, the MEF raised the target from a 3% deficit projected in February to 3.4% of the Gross Domestic Product (GDP). Among the reasons that led to the adjustment of the structural fiscal result (RFE)the portfolio headed by Arbeleche pointed out the “fall in structural income and lower nominal GDP, the result of lower inflation and lower real GDP accumulated due to (the impact of) the drought.”

Although the economic team recognized “the potential tax diversion planned for 2024,” he said that the adjustments “do not in any way imply a fiscal relaxation coinciding with the election year”, as argued in the document presented.

Warnings about “moving the goalposts”

In February, after the previous Accountability, the Fiscal Advisory Council (FAC) had already warned about the risks to adjust fiscal goals, regardless of whether the argument put forward was pertinent. This could weaken the fiscal institutionality or, at least, go against consolidating the credibility and transparency of the achievements in this area.

According to the members of the CFA in the “Report on the calculation of the Structural Fiscal Result at the end of 2023”the situation presents a trade off or dilemma between changing the original goal at the risk of undermining the credibility of the results or risking having “ex post deviations”.

This was a criticism made at the time also by the then pre-candidate of the Broad Front and former president of Central Bank of Uruguay (BCU), Mario Bergara. “It is insufficient when the minister emphasizes that the pillars of the fiscal rule, of her fiscal objectives, are met, this is not the case either. Firstly, the fiscal goals were changed midway, the arch was moved Halfway through, the fiscal results anticipated by the rule at the beginning of the year are not being met, but rather they were changed halfway to comply. It’s like moving the goal so that the ball goes in,” he questioned.

With the recent new adjustment, the magnifying glass is once again placed on this already recurring practice by the MEF. Although, unlike what happened in February, the economic team partially addressed the CFA suggestion in its latest report, and left unchanged the reference goal established in the first pillar of the fiscal rule, which indicated a structural fiscal result of – 2.9% of GDP—after raising it from -2.6%.

Source: Ambito

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