FISCAL POLICY IN THE RECENT DOWNTURN: READY FOR ANOTHER ROUND?
required, there is the risk that increased expenditures become permanent, simply adding to the fiscal burden in each downturn and eventually leading to costly fiscal adjustment or debt restructuring. The exercise of countercyclical fiscal policy entails not only a fiscal expansion in downturns, but also—and critically—its removal afterwards and eventually a fiscal contraction in the booms. Otherwise, fiscal policy would simply be expansionary. It is therefore key to examine the fiscal stance after 2009, when recovery began. By 2011 temporary revenues were about neutral, calling for a normal fiscal stance. It causes concern that expenditure does not show any sign of retrenchment as recovery started to take hold, and was even inching up in 2011 according to preliminary information (Figure 5.2). Moreover, considering more detailed information it appears that expansions in social programs have typically been more inflexible (see Box 5.1).
Box 5.1 Fiscal Stimulus Measures in Latin America and the Caribbean The bundle of “fiscal stimulus packages” recently implemented in Latin American countries can be divided into three broad categories (see the table in Appendix H). First, countercyclical measures were launched in order to sustain aggregate demand. Those include cutting taxes, infrastructure investments and other measures in support of the private sector. Second, a series of emergency measures were put in place in order to support labor demand, as in the case of workfare programs. Third, existing social protection programs were expanded in order to protect the incomes of those most vulnerable to falling into poverty as a consequence of the economic downturn. For instance, Brazil’s conditional cash transfer (CCT) program Bolsa Família has extended coverage to an additional 1.3 million families and also increased the value of its benefits. Colombia likewise increased the coverage of its CCT program (Familias en Acción) by 1.5 million families and increased expenditures on social programs by 42%. In Mexico, the Temporary Employment Program was expanded by 40% over what had been planned, a new in-kind transfer program was launched to target the poorest rural communities (Programa de Apoyo Alimentario) and the CCT program Oportunidades extended its coverage to an additional 1 million families. While the vast majority of fiscal stimuli were progressively scaled back by the end of 2010, the increase in social spending remained largely in place in the aftermath of the global financial crisis. There may be various explanations behind this phenomenon. One hypothesis is that the targeting mechanism embedded in social programs, which is highly skewed toward the poor, might have played a key role. Poor voters are more likely to trade off political preferences in exchange for public resources. Accordingly, programmatic redistribution schemes may be more politically costly to scale back vis-à-vis fiscal measures that usually affect both poor and rich segments of the population.
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