Fiscal policy and management play a key role in a country’s economic growth and macroeconomic stability because they affect the incentives of economic agents related to savings, investments, high-quality human capital accumulation, and innovation.
Latin America and the Caribbean have experienced low long-term growth due to, among other things, a low productive factor yield despite an increase in the number of workers and growing capital stock.Fiscal policy and management play an important role in the region’s economic development and equality. Governments have a great opportunity to strengthen their policies and adopt a form of fiscal management that fosters a significant impact on growth and equality.
To support countries in this endeavor, the IDB finances projects, provides technical assistance, and offers advisory services to governments to promote development through each of the following areas:
The IDB supports projects to reinforce the design and implementation of tax policies that foster productivity, boost economies’ efficiency, and further equality.
The Bank also finances projects to strengthen tax management to increase revenue and improve their effectiveness and efficiency.
Lines of action:
(i) Improving the design: regarding tax systems’ structure, regarding their neutrality, sufficiency, simplicity, and progressiveness;
(ii) Expanding the tax base: by reducing tax evasion and expenditure;
(iii) Enhancing coordination: in assigning and outlining tax responsibilities among various levels of government;
(iv) Institutional and technological upgrade of the tax administrations;
(v) Strengthening institutional capacities: regarding international taxes;
(vi) Promoting the use of technology: for administrative tasks, electronic invoicing, and big data cross referencing.
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The fiscal challenges that countries in Latin America and the Caribbean must overcome to boost economic growth and equality include improving the quality of public investment in infrastructure, social expenditure, public procurement management, and saving on energy and transportation subsidies.
The Bank finances projects to improve the effectiveness, efficiency and equity of public expenditure both in its structure and in the following fields of action:
(ii) Advancing coordination: in assigning and outlining roles among different levels of government regarding expenditure responsibilities;
(iii) Bolstering public investment and PPP management: including the institutional framework, planning, evaluation methods (ex-ante and ex-post, value for money), training, monitoring, and follow-up;
(iv) Strengthening the budgeting process: including adopting middle-term expenditure frameworks as well as budgeting based on results and management for development results;
(v) Modernizing Public Financial Management: reinforcing Integrated Systems of Financial Administration; expanding the scope of the Single Treasury Account; and promoting the implementation of the International Public Sector Accounting Standard (IPSAS);
(vi) Improving social spending targeting, reducing leaks;
(vii) Promoting the design: of subsidy regimes and transferences to foster employee and corporate formality;
(viii) Modernizing public procurement management: including electronic procurement platforms, reversed auctions, and catalogues of generic prices of goods and services.
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The Bank’s main goal in the sector is to favor the development of institutional capacities and the adequate incentive structure for a more effective and efficient subnational administration that contributes to improve the quality of life of every citizen in Latin America and the Caribbean.
The Bank directs investments according to each country’s specific conditions, following each of these fields of action:
(i) Reinforcing intergovernmental arrangements: including transference regimes in order to promote an efficient and effective management with equality among subnational governments;
(ii) Improving expenditure management and service provision: increasing subnational governments’ ability to manage spending and deliver efficient, high-quality services to foster local economic development;
(iii) Promoting own income generation: advancing subnational governments’ ability to generate their own income to provide cost-efficient services;
(iv) Increasing subnational governments’ access to funding: within a framework of sustainability and fiscal responsibility to develop sustainable and efficient public investment capacities.
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The fiscal policies supported by the IDB seek to promote consistent economic growth in a context of fiscal sustainability and macroeconomic stability.
The Bank funds interventions that promote institutional mechanisms and capacities to limit the improper use of discretional policy, contributing to solvency and fiscal stability.
Lines of action:
(i) Reducing fiscal policy bias: regulations, design and implementation of structural and non-structural fiscal rules, and fiscal responsibility rules;
(ii) Strengthening fiscal discipline: middle-term fiscal framework (trending and anti-shock modeling);
(iii) Evaluating macro-fiscal results: institutional design of independent fiscal institutions;
(iv) Reinforcing commodity resources’ public savings: institutional design of sovereign funds;
(v) Strengthening debt management and fiscal risks associated with contingent liabilities: debt strategies; debt sustainability models; registry and methods to measure contingent liabilities associated with PPPs, pension systems, and state guarantees for non-sovereign bonds, among others;
(vi) Environmental sustainability and climate change: establishing the necessary incentives to adopt fiscal policies that foster environmental sustainability and climate change adaptation and mitigation actions.
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The IDB funds initiatives that promote higher levels of transparency and responsibility in the fiscal area, supporting actions that increase transparency of public resource allocation, as well as creating public information systems that help measure the quality, efficiency, and effectiveness of public spending.
Lines of action:
(i) Promoting the adoption of international standards of the Fiscal Transparency Code, comprising: fiscal reports, fiscal and budget outlooks, and tax resource management;
(ii) Supporting the adoption of international standards for public accounting as defined by the International Public Sector Accounting Standard (IPSAS) to increase transparency;
(iii) Promoting a reliable consolidation of public accounts: including spending by the central government, decentralized public companies, subnational agencies, and social security and welfare;
(iv) Increasing transparency and accountability, as well as oversight and control by citizens and by other government areas funding, regulating, and keeping track of subnational operations.
The Bank promotes the adoption of new technologies and digital platforms in the public sector’s fiscal and financial fields to strengthen collection, reduce tax evasion and informality, increase fiscal transparency, and improve the quality of public spending.
Lines of action:
(i) Supporting the implementation of integrated information systems that allow automatic data cross-referencing between public agencies (i.e. social security and tax administration), capitalizing on the advantages of the “cloud”, blockchain, and biometric identification technologies to improve spending precision and combat tax evasion and informality. (ii) Using online purchasing services platforms as well as big data and datamining on generic goods and services price catalogues and online reverse auctions to increase the efficiency and transparency of public procurement.
(iii) Promoting solutions supported by algorithmic tools to provide better information on public investment decisions.
(iv) Creating fiscal and public expenditure observatories based on big data and machine learning to increase fiscal transparency.
(v) Supporting the use of artificial intelligence, blockchain technology, and fiscal audits to strengthen tax administration.
(vi) Updating land registries with georeferenced digital systems and implementing electronic invoices to improve tax administration.
(vii) Supporting the adoption of technological instruments to oversee cargo, merchandise, and vehicle transit to improve customs services.
(viii) Analyzing trends and outlook of the impacts of the new digital economy and automation on expenditure and fiscal revenue.