Fiscal Redistribution, Sustainability, and Demography in Latin America

The paper investigates empirically the links between the fiscal space, fiscal redistributions, and distributional outcomes for the case of Latin America. It focus on two factors; first, the role of intertemporal restrictions and debt sustainability and, second, the demographic transition’s influence on the fiscal redistribution structure. The paper identifies some stylized facts that matter in designing distribution-friendly fiscal consolidation policies. Two findings deserve highlighting. First, the way in which a given fiscal adjustment is implemented matters to income distribution. As a general rule, the downward adjustment of expenditures is regressive, although the importance of the impact varies substantially according to the expenditure item and from one economy to another. Second, the Demographic Window of Opportunity (DWO) is the key stage of the demographic transition regarding the fiscal space in Latin America. Younger countries are entering the DWO and the older ones have to prepare to abandon it and enter the aging stage. The exercises suggest that the DWO will create the fiscal space required to implement progressive policies in younger countries while the opposite will occur in the countries that will age. The simulations indicate that the demographic transition-driven effects on the items of fiscal redistributions are potentially very large and have substantial consequences for income distribution and debt sustainability.