He Fiscal Advisory Council (FAC) published its semi-annual report on the calculation of the Structural Fiscal Result (RFE) from the Surrender of Accounts 2023 presented by the Ministry of Economy and Finance (MEF). In it he highlighted that, for the first time and after four years of compliance with the fiscal rule Overall, the government will not achieve the goals set out in two of the three pillars.
As is customary after the presentation of the Accountability Report – both in February and at the end of June – the CFA presented its own evaluation regarding the fiscal rule, in which it verified that the calculation of the RFE for the Central Government and the Social Security Bank (GC-BPS) was adjusted to the current methodology.
However, one of the main focuses of the document was on the modification of fiscal projections.
Failure to meet targets and rigidity of fiscal projections
One of the most striking issues in the government’s Accountability Report was a new adjustment in the fiscal projections. This was also pointed out by the CFA, which also stated that the goals in the three pillars of the rule were not updated. That is, although the expected result was modified, the desired objective remained as it was established last February, at the time of the 2023 fiscal year.
What does this mean? That, for the first time, the projections for 2024 contemplate an ex-ante non-compliance with the indicative targets, in this case for pillars 1 and 2, of the Structural Fiscal Result and the primary expenditure ceiling, respectively.
“In light of these new projections, the MEF estimates that the RFE of pillar 1 of the rule for the GC-BPS would close at -3.4% of GDP (indicative target -2.9%); primary expenditure of the GC-BPS that makes up pillar 2 of the rule would grow 4.8% in real terms compared to the previous year (indicative limit of 2.8%); and the indebtedness The net GC loss was estimated at US$2.294 billion, below the legal limit established in Law No. 20,212 of US$2.3 billion,” the CFA stated in its report.
The autonomous body composed of Alfonso Capurro, Ana Fostel and Jorge Roldós -and with Ignacio Umpierrez as executive secretary—considered that, despite these adjustments, it is necessary to analyze the RFE “as an indicator of the structural position of public finances over the effective fiscal result”, since, due to specific extraordinary income, the effective deficit would have a reduction of 0.2 percentage points of Gross Domestic Product (GDP): would go from 3.3% in 2023 to 3.1% in 2024.
However, this projection of non-compliance was highlighted, a fact that occurs for the first time since the creation of the current fiscal institutionality; and which does not occur in minor proportions either: non-compliance in pillar 1 is estimated at 0.5 pp of GDP, and in pillar 2, at 2 pp of GDP.
“It is important to note that, as reflected in international experience, fiscal rules may be breached for various reasons, without this invalidating their importance or that of the fiscal institutional framework. In the Uruguayan case, it is noteworthy that the new fiscal framework presented compliance with the fiscal rule in its three pillars during its first four years, with positive impacts on observable variables such as credit rating, reduction of country risk and lower procyclicality,” the CFA insisted in the evaluation report.
From the Fiscal Advisory Council they maintained that the non-compliances of the fiscal goals “are not a problem as long as they are infrequent, transitory, and their causes are explained, as well as the convergence mechanisms necessary to return to the established path.” In the Uruguayan case, this last point was left pending by the MEF, although they pointed out that the modifications did not respond to a discretionary increase of expenditure, but to the correction of forecast errors in relation to the inflation Yet the tax collection.
Likewise, the oversight body warned that the projections contemplate a passive fiscal policy to deviations from a structural point of view, something risky in a scenario with limited room for manoeuvre given the rigidity of many expenditure items. “The structural fiscal position of public finances would be far from a situation of slack and consistency in 2024 with a structural primary result that guarantees a sustainable debt trajectory in the medium term,” they concluded, turning on yellow lights on the structural deficit projections for this year.
Source: Ambito
