PRSPs, Macroeconomic Constraints and Fiscal Policy

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PRSPs, Macroeconomic Constraints and Fiscal
Policy

• Humberto Lopez (PRMPR)

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Fiscal Policy Three levels

• Aggregate fiscal policy /framework
• Deals with HOW MUCH WE CAN SPEND.
• Budget envelope, sustainability of fiscal policy.
• Efficient allocation of resources
• Deals with WHERE WE SPEND.
• Sectoral envelopes, policy priorities.
• Operational efficiency
• Deals with HOW WE SPEND.
• Modalities of service delivery.

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This presentation

• Deals with the First Level and covers
• Why is important to have a sound fiscal
  framework?
• In principle, a poverty reduction strategy that
  is not embedded in a coherent macroeconomic
  framework will not be credible (sustainability,
  resources)
• What do we understand by a sound fiscal
  framework?
• Beyond philosophical considerations, what is that
  operational staff should be looking at?
• What does a sound fiscal framework implies for
  poverty reduction strategies?
• One example (Honduras) that computes the fiscal
  and social envelopes available for a Poverty
  Reduction Strategy.

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Importance of sound fiscal policy.

• Lack of fiscal discipline has been blamed for
• Crisis
• LAC Debt crisis in the 1980s, HIPC Initiative,
  Argentina
• Poor economic performance
• Unambiguously, deficits are bad for private
  investment, growth, and hence for poverty
  reduction
• Increased Vulnerabilities
• One of the few policy measures we know to raise
  national savings (a critical element to reduce
  vulnerabilities) is to increase public savings
• All these elements have significant negative
  effects on whole population, but especially on
  the poor.

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More close to the HD network

• Lack of fiscal discipline leads eventually to
• Program discontinuity
• Cancellation of programs, in many cases in the
  social sectors, due to lack of funds.
• Inefficiencies
• Problems with counterpart funds, delays in
  implementation schedules, etc.
• And as a result, WASTE
• Sunk costs, cost-benefit changes due to longer
  implementation schedules, etc.

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When a fiscal framework is sustainable?

• One possible definition (not unique!).
• In principle, deficit must be consistent with
  non-explosive debt dynamics.
• Requires defining what we mean by non explosive
  dynamics. For HIPC countries, the HIPC thresholds
  seem a natural choice.
• Deficits should be fully financed.
• In developing countries, it might help assuming
  that the deficit is fully financed with external
  concessional resources.
• There remains the problem of how to deal with the
  tax level.
• Depending on existing tax levels, and given the
  negative impact of tax increases on growth, one
  has to be careful about proposing a tax increase.

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Fiscal policy 101

• Stock of foreign debtDeficit ? Stock of
  foreign debt
• ?(??-?)/(1??)
• Given inflation (?), GDP growth (?) and exchange
  rate (?) expectations it is possible to compute
  the Deficit (as a of GDP) the country can
  afford.
• Deficit ( of GDP) ? Debt target ( of GDP)

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One example Honduras Debt and Deficit consistent
targets
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But we could not find resources to finance it

• Best estimate of financing US250 million per
  year against requirements of

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Implications for poverty reduction strategies

• Two main ingredients
• Overall spending envelope
• Growth rate
• Tax levels, sustainable deficit levels
• Allocation to social sectors within the budget
  (social sectors envelope!)
• Social expenditure ratio (SER) (UNDP
  recommendation 40)

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HND Social spending Scenarios
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But

• When we take into account population growth and
  current per capita spending

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Conclusions

• We have to face fiscal constraints
• Consistency with the macro framework.
• Consistency with financing availability.
• We have to be realistic
• What is the mileage we can get from the available
  resources.