Economics: Risk of ineffective countercyclical spending plans
In the context of the low economic growth expected for 2019 and 2020, and reduced public finance margins, the finance ministry has announced its intention to introduce a countercyclical fiscal mechanism that would redefine the function of the Budgetary Revenue Stabilization Fund and the possibility of accumulating greater public deficits in the event of economic slowdowns or recessions. However, the final terms of the legal reforms needed to introduce this mechanism will directly affect sovereign debt ratings and country risk if the changes are seen as no more than a pretext to crank up spending in order to cover the priority projects and programs the federal government announced at the beginning of this administration.
The finance ministry will likely propose establishing countercyclical spending mechanisms. The specifics will determine whether such mechanisms can effectively function as an expansive policy leaving macro financial variables at stable levels, or instead generate greater uncertainty if perceived as nothing more than a justification to accelerate spending without ever addressing the historical problem of a weak tax base.
The actual message sent by the implementation of the countercyclical policy will depend on the specific channels through which the related spending is applied: highly profitable investment projects or programs that can have a positive impact on the population groups most vulnerable to economic cycles.
Officials had earlier offered a major expansion yet predictably unrealistic proposal of development bank financing for such projects, and more recently said they are committed to public-private partnerships, but in the absence of any assurances that government is now ready to provide the minimal certainty needed for such joint undertakings, as well as a commitment to respect the rule of law, it is very unlikely that private sector businesses will start lining up to request development bank loans or start entering into partnerships.
Perhaps most importantly, the promised legislation must clearly specify the cases in which countercyclical spending would be possible and to which specific projects and programs it could be applied, while leaving little room for interpretation or for additional spending proposals by the promised fiscal council with supposed technical independence.
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