Fiscal rules in Latin America: a survey

This survey first discusses general characteristics, advantages and disadvantages of different types of fiscal rules. The criterion for classifying them is based on the emphasis given: long-term sustainability (reducing the deficit bias and controlling the growth in public debt) or reducing the procyclicality of fiscal policy (short-term stabilisation). It then reviews the experience with fiscal rules in seven Latin American countries, as their use has become more widespread since the early 2000s. Only Chile targets cyclically adjusted indicators, although Colombia is also taking that approach and the Mexican rule offers some stabilisation properties. Argentina, Brazil and Peru apply numerical rules targeting the overall/primary public balance and/or public spending. The Venezuelan framework has, in practice, been diluted after its introduction. The coverage of the rule depends on the degree of decentralisation of fiscal systems, with many countries including debt limits on the sub-national governments as a key tool to face the common pool problem that emerges in federal states. All in all, fiscal rules in Latin America have been more effective in helping to strengthen long-term sustainability than in responding to shocks, as proved by the recent financial crisis. Fiscal rules have had to be fine-tuned over the years and a “second generation” of fiscal rules – combining the sustainability objective with greater flexibility to accommodate economic shocks – appears to be necessary in order to increase their efficiency.