Fiscal Space for Investment in Infrastructure in Colombia

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Fiscal Space for Investment in Infrastructure in
Colombia

• Rodrigo Suescún
• The World Bank
• January 2005

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Fiscal Space for Investment in Infrastructure in
Colombia

• Motivation
• Main Features of the Model
• The Model
• Simulation Results
• Creating Fiscal Space

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Fiscal Space for Investment in Infrastructure in
Colombia

• Motivation
• In many countries productive public investment
  has been compressed in the process of fiscal
  adjustment
  
• Public investment contraction may entail a
  growth cost unless offset by private
  initiative, which has not been generally the
  case
• This trend is not apparent in Colombia

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Fiscal Space for Investment in Infrastructure in
Colombia

• Motivation
• Evaluation of Macroeconomic Policies in
  Colombia
  
• Financial Programming Model

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Fiscal Space for Investment in Infrastructure in
Colombia

• Motivation
• Financial Programming Model
• Growth rate is exogenous, independent of
  policies
  
• Timing of policies is irrelevant
• Expectations play no role
• No foward looking behavior
• No purposeful behavior

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Fiscal Space for Investment in Infrastructure in
Colombia

• Motivation
• Financial Programming Model
• Focus on fiscal deficit and gross debt targets
  distinction between current and capital spending
  is irrelevant
  
• Bias against public capital formation
• Static framework vs asset-creating nature and
  intertemporal trade-offs involved in public
  investment decisions
  

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Fiscal Space for Investment in Infrastructure in
Colombia

• Motivation
• Concerns
• Already high public debt (54 of GDP in 2003)
• Actual fiscal position
• (Overall budget deficit in 2003 3.1 of GDP in
  consolidated)
  
• Future unfunded state pension deficit
• Risk
• Fiscal adjusment using capital spending
  (inflexible budget)
  

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Fiscal Space for Investment in Infrastructure in
Colombia

• General Objective
• Construct a dynamic general equilibrium model to
  study economic behavior under alternative fiscal
  policies
  
• Two forces explain off-steady state dynamics
• Fiscal polices (perfect foresight)
• Current policies and economy off their steady
  state sustainable balanced growth path
  

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Main Features of the Model

• Small open economy
• Two goods home foreign goods
• Agents household, firms and government sector
• Central gov current and capital spending, taxes
  on labor and capital income and consumption and
  domestic debt
  
• Rest of gov operates infrastructure, current and
  capital spending and budget surplus target to
  improve combined public sector finances
  
• Upward-sloping supply of funds

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Model

• Three reproducible factors infrastructure
  capital, business capital and human capital
  
• Infrastructure capital

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Model

• Business Capital
• Human capital

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Model

• Production Function
• Firms problem standard

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Model

• Households Problem
• Preferences

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Model

• Households Problem
• Budget constraint

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Model

• Households Problem

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Model

• Government

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Model

• Resource Constraints
• Upward-sloping supply of resources

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Creating Fiscal space

• Golden rule
• Permanent balance rule
• Redefinition of the public sector

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