He Fiscal Advisory Council (CFA) presented a series of recommendations to strengthen the fiscal framework, following the Accountability presented by the government and in view of the five-year Budget Law that the next government will discuss in 2025.
In its semi-annual report, the CFA launched the Ministry of Economy and Finance (MEF) operational, methodological and institutional advice against fiscal deficit, which includes issues such as a prudent debt, corrective mechanisms for deviations and a broader role for the Council itself.
Prudent debt
Among the possible improvements to get out of the fiscal crossroads, the need to incorporate the ratio of prudent debt to GDP as a reference anchor for medium-term fiscal sustainability.
“The estimation of a prudent debt level should consider sustainability analysis, institutional and market variables, and idiosyncratic features,” he said through his X account. Ignacio Umpiérrez, executive secretary of the CFA.
Structural Fiscal Result
Another objective to pursue is to maintain the Structural Fiscal Result (RFE) as an operational rule over the effective result, as proposed by the body that integrates Alfonso Capurro, Ana Fostel and Jorge Roldós.
Among the benefits, they highlighted that it allows “greater room for maneuver for active fiscal policy in the face of shocks”, as well as “the adoption of prudent criteria when evaluating permanent income/expense measures.”
Debt sustainability
A fundamental aspect is to establish annual goals of Structural Fiscal Result compatible with the objective of sustainability of debt.
These must be “legal, annual and non-modifiable for a horizon of 5 years at the beginning of each government,” he said. Umpiérrez and called for considering “convergence to the debt objective and different from the projection.”
Correction mechanism
Incorporate correction mechanisms for detours The Structural Fiscal Result goals are another of the axes, something that had already been raised by the CFA previously.
In this case, quantitative or qualitative criteria should be specified. “If they are punctual or accumulated, measures of active fiscal policy; gradual or discrete adjustment; control and supervision mechanisms,” the executive secretary explained.
Improve the schedule
It is also proposed to adjust the RFE publication schedule and to do so in two stages, one in March and the other in June or August.
One possibility would be the last business day of March for the presentation of the Accountability Report for the annual fiscal closing of the previous year and the last business day of June or August, when presenting the Accountability Bill or the Bill National Budget Law.
Strengthening the RFE estimate
Among the methodological aspects, it calls for strengthening the estimation of the RFE by incorporating at least two other complementary methodologies for calculating the Potential GDP and the GDP gap.
An eventual alternative to consider could arise from averaging the results of three methodologies for calculating potential GDP and the GDP gap as carried out by the Central Bank of Uruguay (BCU) for its management of the monetary politics,
Strengthen the current methodology
At the same time, it is called for strengthening the current methodology production function for calculating potential GDP and the GDP gap.
“Refining its functional form, incorporating idle capacity indicators and exploring better alternatives for the treatment of inputs by the Committee of Experts.
Greater independence for the CFA
In institutional aspects, the CFA calls for “greater legal and operational independence”, in line with what was proposed by the MEF in its latest report, when it spoke of a larger budget and expansion of roles, in line with what is happening in other countries in the region.
“In practical terms, this means providing legal autonomy to the CFA, assign a budget item in order to finance its operations and carry out independent research and evaluation activities on fiscal policy and to expand its missions,” the agency said in its report.
Role expansion
In this regard, the Council aims to expand its roles to include, among other things, analysis of sustainability of debt, evaluation of macro fiscal projections including baseline and alternative scenarios, opinions on deviations and convergence measures; and dissemination of reports at parliamentary and governmental levels.
Better comunication
Finally, the Fiscal Advisory Council aims to strengthen pedagogical communication on the importance of fiscal rule as an instrument for sustainability and fiscal responsibility.
The objective of this point is to generate cross-cutting consensus at the level of the political system, analysts, specialized press and the general public.
Source: Ambito
