Fiscal policy is an invaluable tool for reducing inequalities, so it is vital to a programme like EUROsociAL+, which promotes social cohesion in Latin America. The public finance area of the European Union programme has participated in the Public Finance Laboratory organised by AECID.

What is the Public Finance Laboratory, organised by AECID, that EUROsociAL took part in, and why is it being implemented at this time?

The International Monetary Fund’s chief economist, Gita Gopinath, has pointed out that after the impact of COVID, the world faces a global liquidity trap, which requires a decisive and forceful use of fiscal policy, and public spending in particular, in order to avoid the dangerous effects that 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, designed to reactivate the European economic space.

Faced with this situation, the Spanish Cooperation Training Centre (CFCE) in Montevideo has, through the AECID INTERCOONECTA platform, 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.

This laboratory is part of Spanish cooperation’s joint response strategy against COVID and seeks, through the exchange of knowledge and experiences, to contribute to improving the efficiency and effectiveness of fiscal policies to achieve the harmonisation of domestic resources and meet the demands of citizens without leaving anyone behind. 

What recommendations and lessons learned in the field of public spending has the EUROsociAL programme collected that are of vital importance for Latin America?

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.

How can public spending be made more efficient? What sectors should it focus on?

The increase in public spending should, in effect, be directed towards those sectors with the greatest 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, this 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 these 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, that the COVID crisis has further exacerbated. In addition, these redistributive policies will make the increased economic growth more profound.

Why is it important to strengthen public capacities to improve the quality of spending? How is the EUROsociAL programme actually doing this in practice?

Because 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 and 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, at EUROsociAL+, particularly 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 designing 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 Central America.

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.

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