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Covid and after: the battle for fiscal space in LAC

Conclusion: politics holds the key

This paper has argued that in the post-pandemic era LAC countries will in principle be able to recover and rebuild lost fiscal space so that they will eventually reduce the public debt burden and get themselves back on a pathway of sustainable economic growth. Getting back on track will be achieved not by a single dramatic policy decision, but by a combination of incremental changes affecting the fiscal cycle. A crude eight-stage model of fiscal adjustment was described, with opportunities for deficit reduction in each of its stages. These include reducing tax avoidance and evasion, raising income and wealth taxes, undertaking profound reforms on the spending side (particularly relating to health, social programmes, and education), introducing multi-year budgets, strengthening fiscal responsibility rules, and managing debt levels in the most efficient ways possible. Other factors are also in play, capable of making the fiscal cycle more or less difficult. Relatively low global interest rates provide an opportunity to ease fiscal pressures; Latin America’s gradually ageing population profile is likely to act in the opposite direction.

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