Numerical Compliance with Fiscal Rules in Latin America and the Caribbean

Abstract

This paper introduces a dataset that gathers information on whether and how Latin America and the Caribbean (LAC) have complied with or deviated from implemented fiscal rules. It provides annual data on fiscal rules for 14 LAC countries from 2000 to 2020, and it considers the design features of the rules and information about numerical compliance. It provides descriptive statistics reflecting the panorama of the fiscal rules implemented in LAC countries. Additionally, it calculates compliance rates across countries, years, and rules. On average, this study finds that compliance with rules aiming to constrain debt ratios and structural balances is the highest, while compliance with fiscal balance and expenditure rules is the lowest. Furthermore, the data collection process revealed that LAC countries still have room for discretion even when they subject their fiscal policy to rules. To address this problem, the paper proposes an adjusted compliance index that considers different elements that add degrees of discretion to the rule. The study finds that the numerical compliance rates of each country are likely to be over-estimated once discretionary actions are accounted for.

Determinants of compliance with fiscal rules: Misplaced efforts or hidden motivations?

“…Ex-ante analysis cannot be carried out due to the high uncertainty about future macroeconomic developments and also due to the degree of discretion that governments have. Using the dataset by Valencia and Ulloa-Suarez (2022) allows us to avoid this problem, since when the objectives are presented at the beginning of the period (e.g., at the beginning of the fiscal year or of a new government), and there is the legal possibility of adjusting it with the updating of the projections used, they consider the first objective set as a reference to assess compliance.…”

“…Building on the results of the previous sections, we consider additional determinants of compliance that focus on aspects closer to the operation of fiscal rules. For example, we consider the two most recurrent combinations of rules, as pointed by Valencia and Ulloa-Suarez (2022), and other variables to account for discretion included in their adjusted index for compliance.…”

“…As the pandemic unfolded and the real effects on the economy became more precise, the fiscal rules 1 , and the long-term commitments established therein turned out to be a very rigid limit to the expected and necessary response from governments. The shock in 2020 was of such magnitude that 70% of the LAC countries that have at least one fiscal rule decided to invoke the escape clause 2 to suspend or modify their objective for at least one fiscal year (Valencia and Ulloa-Suarez, 2022). In 2021 and 2022, despite the prompt recovery of economic growth, several countries maintained this action because the fiscal stimulus or 1 A fiscal rule is defined as a long-lasting constraint on fiscal policy through numerical limits on budgetary aggregates, which cannot be frequently changed.…”

Fiscal Rules: Challenges and Reform Opportunities for Emerging Markets

“…For example, during the years preceding the pandemic, more than half of emerging market and low-income countries with BBRs saw their deficits exceed the rule limits, with the median deviation exceeding 2 percent of GDP (Davoodi et al, 2022a). More specifically, in a sample of Latin American economies, average compliance with some type of rules was as low as 30 percent, meaning that countries are compliant less than a third of the time (Valencia and Ulloa-Suárez, 2022).…”