Taxonomy Matters: Fiscal Policy

5 minute read.

According to the Oxford Dictionary of Economics (5th ed.). Fiscal policy is the use of taxation and government spending to influence the economy. This may work via changing tax rates or the rules about liability to tax, or via changes in government spending on real goods and services or transfer payments. Fiscal policy can be used both to influence the level of aggregate demand in the economy, and to change the incentives facing firms and individuals so as to encourage or discourage particular forms of activity. 

Strategic decisions regarding government spending and taxation allow fiscal policy to either stimulate economic activity or help mitigate the risks of an overheating economy. One invaluable resource for exploring this topic is FISLAC, an initiative by the IDB’s Fiscal Management team, which  offers valuable insights to support macro-fiscal policy decision-making.

In this edition of Taxonomy Matters you will find a list of knowledge products related to the area of fiscal policy.

Datasets

Database of Equivalent Fiscal Pressure in Latin America and the Caribbean – 1990-2021: Update and Status in the Post-COVID-19 Pandemic Recovery

This is the third update of the Equivalent Fiscal Pressure (EFP) Database for Latin America and the Caribbean (LAC) for the period 1990–2018, based on the IDB-CIAT methodology. The EFP provides a more precise measurement of total resources collected in the region and comprises four components: 1. Traditional tax revenues from general government, including subnational governments. 2. Public contributions to social security. 3. Mandatory contributions to private social security schemes. 4. Non-tax revenues from natural resource exploitation. Following the upward trend since the 1990s, the average EFP for 25 countries increased by more than 6 percentage points of gross domestic product (GDP), rising from 17.3% to 23.6% between 1990 and 2021. Medium-term dynamics are primarily driven by tax revenues, which grew from 13.5% to 18.0% of GDP over the same period. At the individual country level, there is significant heterogeneity in both the evolution and levels of tax revenues and EFP.

Publications

Dealing with Debt: Less Risk for More Growth in Latin America and the Caribbean

Here is an overview of this document generated by the AI functionality of our Publications Catalog:

The publication analyzes the economic challenges in the region, emphasizing the need for coordinated fiscal and monetary policies to achieve macroeconomic stability. It highlights the importance of private sector involvement and the role of international financial institutions in managing financial affairs. The book provides insights into debt sustainability, sovereign debt management, and the impact of global events on economic prospects, while also discussing successful debt reduction strategies. It serves as a guide for policymakers to navigate fiscal sustainability challenges, particularly in the context of the pandemic, global downturns, and climate crisis pressures.

Voter Responses to Fiscal Crisis: New Evidence on Preferences for Fiscal Adjustment in Emerging Markets

Here is an overview of this document generated by the AI functionality of our Publications Catalog:

The publication investigates voter preferences for fiscal adjustments in response to economic crises in four Latin American countries: Brazil, Colombia, Costa Rica, and Peru. Through a conjoint experiment involving 8,000 respondents, it reveals that individuals generally favor spending cuts over tax increases. However, preferences vary significantly based on the specific types of tax and spending adjustments proposed, as well as individual characteristics such as ideology, social beliefs, and trust in government. Notably, respondents oppose increases in personal income tax and support cuts in public employment, while showing indifference or support for higher corporate taxes and maintaining social assistance. The findings highlight the complexity of voter attitudes towards fiscal policy adjustments.

Fiscal Policy, Income Redistribution, and Poverty Reduction in Latin America

Here is an overview of this document generated by the AI functionality of our Publications Catalog:

The publication analyzes the intricate relationship between fiscal policy, income inequality, and poverty across eighteen Latin American and Caribbean countries. It examines the effects of fiscal measures, including taxes, transfers, and subsidies, on income distribution and poverty levels, providing a comparative analysis with non-LAC upper-middle-income countries. The authors highlight the significant variability in the effectiveness of LAC fiscal systems in reducing inequality and poverty, emphasizing the need for policymakers to consider the quality of public services and the behavioral impacts of fiscal measures to enhance their effectiveness. This work serves as a vital resource for understanding the dynamics of fiscal policy in addressing income inequality and poverty in the region.

From Macroeconomic Stability to Welfare: Optimizing Fiscal Rules in Commodity-Dependent Economies

Here is an overview of this document generated by the AI functionality of our Publications Catalog:

The working paper analyzes fiscal policy rules in commodity-dependent economies, particularly focusing on welfare and macroeconomic stability. Centered on the Chilean economy, the authors argue that an optimal fiscal policy should respond countercyclically to tax revenue and procyclically to commodity revenue, which can enhance welfare for both Ricardian and non-Ricardian consumers. The study emphasizes the importance of considering debt sustainability in fiscal rule design and employs Bayesian methods for parameter estimation, providing a more realistic evaluation of welfare-maximizing fiscal policies. The findings offer significant insights for policymakers aiming to improve welfare and stability in commodity-dependent economies.

You can also explore our publications catalog for more knowledge product related to Fiscal Policy:

• IDB publications tagged with the subject “Fiscal Policy.”

Additionally, we invite you to visit the blog Recaudando Bienestar that focuses on fiscal policy and other related topics.