By Fernando de la Cruz, Democratic Governance technician with the EUROsociAL+ Programme at FIIAPP
Recently, the International Monetary Fund’s chief economist, Gita Gopinath, pointed out that, after the impact of COVID, the world faces a global liquidity trap, which obliges a decisive and forceful use of fiscal policy especially related to public spending to avoid the dangerous effects that the “chronification” of this situation could have in the long term. One of the first to understand this situation was the European Commission, which months ago launched its massive public spending plan called Next Generation EU with the aim of reactivating the European economic space.
Faced with this situation, the Spanish Cooperation Training Centre – CFCE in Montevideo, through the AECID INTERCOONECTA platform, has organised the “Laboratory on Public Expenditure in the context of COVID-19” with the participation of the European Union’s EUROsociAL+ programme together with other institutions such as the OECD, ECLAC, the IDB and the IEF, a Fiscal Studies Institute dependent on the Spanish Government’s Finance Ministry and an ally of the Programme. Taking advantage of the opportunity offered by the Laboratory, EUROsociAL+ wants to convey three key messages in relation to the new international fiscal situation, as well as a list of the actions it deploys in the Latin American region in terms of public spending.
First, at a global level, public spending must increase significantly. After a decade of monetary interventionism by the world’s main central banks, the impact of COVID has forced a greater amount of slack and monetary expansion (90% of developed countries have interest rates below 1%, 60 % in the case of emerging countries). This situation has left Central Banks with little room for manoeuvre and forces the use of fiscal policy to lever the reactivation of the global economy. In this context, the bulk of international financial organisations are recommending a significant increase in public spending financed by cheap debt, increasing public deficits and the application of selective taxes on sectors that have best weathered the crisis. An environment like the current one, with low interest rates and growing fiscal multipliers, favours a sustainable expansion of public spending in order to avoid “secular stagnation”, that is, persistently low economic growth, which could last for decades.
Second, it is necessary that this increase in public spending be directed effectively towards those sectors with a greater impact on economic reactivation and the promotion of social cohesion. In the first instance, it seems essential that part of this increase in public spending be allocated to the health sector to strengthen the public capacity to face and limit the ravages generated by the coronavirus. In addition, in this first phase, automatic stabilisers have exercised a countercyclical function, however, it is not proving sufficient. It is therefore necessary to increase public investment in those sectors with the highest fiscal multipliers. There is a certain consensus that such sectors are those related to productive infrastructures, the different spheres of human capital (education, R&D, social protection) and reforms that improve institutional quality. Finally, this expansion must aim to correct the inequalities, already present in Latin America, which the COVID crisis has further exacerbated. In addition, these redistributive policies will make greater economic growth more profound.
And, third and finally, an increase in public spending cannot be carried out effectively if public capacities are not strengthened. When institutions are not strengthened and must increase their budgetary execution, phenomena such as inefficiency, misallocation and corruption can arise. To avoid these situations, it is necessary to strengthen public capacities in various fields, such as regulations, human resources, financing, training and incentives, among others. In addition, it is necessary to establish a clear transparent framework in managing and accounting for the results achieved, so that the trust of citizens is reinforced with regard to institutions and their legitimacy for managing these resources.
In this sense, from EUROsociAL+, in particular from the public finances aspect, we are trying to implement fiscal policies aimed at economic reactivation and the promotion of social cohesion. To do this, we are supporting the State of Guanajuato in Mexico in the design of a new social policy that enables social spending to be increased and levels of poverty and inequality in the region to be reduced. In the area of spending effectiveness, we are supporting the “evaluation of public spending” and “mainstreaming the gender approach in results-based budgeting programmes” in countries such as Paraguay, Argentina, Brazil, and the Central American region. Finally, regarding the strengthening of state capacities, the entire EUROsociAL+ Governance area is working to strengthen institutional capacities in areas such as justice, territorial development and good governance.