Fiscal prudence is usually something that is learned. Initially, many governments seem to have a natural tendency in the opposite direction: they tend to overspend or be reluctant to the idea of collecting more taxes. It is not until the undesirable effects of fiscal irresponsibility are understood or experienced that some governments have managed to learn the importance of prudence in the management of public finances.
Latin American governments, for example, learned the hard way. For several years, many of them engaged in fiscally irresponsible behavior. The subsequent economic crises showed the dangers and costs associated with this type of behavior. The sequence is well known: governments spent more, either to boost economic activity or to try to meet the growing demands of society, central banks helped finance said expenses, inflationary pressures increased. If there was a fixed exchange rate, the real exchange rate appreciated, which began to generate problems in foreign accounts, exports decreased, imports increased, the current account deficit grew, reserves were lost, Investors began to distrust the sustainability of this trajectory, capital left and eventually the currency ended up being devalued, which brought inflationary episodes and the need to make an adjustment in the macroeconomy, with the well-known economic and social costs for the population. If you had a flexible exchange rate, the exchange rate depreciated, which fueled inflation and purchasing power was lost. Eventually, to try to control inflation, economic adjustment programs had to be applied, with negative consequences for the well-being of the population. In general, attempts to stimulate the economy or try to help the population ended up being counterproductive. This was something we learned with the economic crises of the 1970s and 1980s in Latin America.
Surprisingly, not all countries in the region learned the importance of fiscal prudence. The most obvious cases are Venezuela and Argentina, which are currently experiencing severe macroeconomic problems, largely caused by their fiscal recklessness in past years. The case of Venezuela is evidently the most serious, since it has even stopped publishing official figures on the amount of its debt. Unofficial estimates suggest that its public debt could be above 200% of its Gross Domestic Product (GDP). For its part, Argentina’s public debt closed 2022 at 85% of its GDP.
These are not, however, the only large countries in the region whose public debt as a percentage of GDP is relatively high. There are two other countries with no lower levels of debt: Brazil, with a central government public debt close to 73% of GDP, and Colombia, with a non-financial public sector debt slightly below 70% of its GDP.
Three other countries in the region (Bolivia, Ecuador and Chile) have lower debt levels, but with somewhat worrying behavior in recent years. Bolivia, for its part, has had an increase in its public debt as a percentage of GDP of 30 (thirty!) percentage points in a period of only 4 years, since its debt went from 36.8% in 2018 to 66.8% of GDP in 2022. Ecuador, meanwhile, saw its debt grow by just over 20 percentage points of GDP in that same period, as it went from 45% to 65.8% between 2018 and 2022. On the other hand, Chile had an increase of 15 percentage points of GDP between 2018 and 2022, since this went from 35% to 50% in said period. In this case, however, what is most striking is its medium-term growing behavior, since in 2010 its debt was only 14.8% of GDP, which implies that in a period of twelve years its level of public debt has more than tripled as a percentage of GDP.
Among the large countries in the region, only three of them stand out for having kept their public debt at low or relatively controlled levels in recent years: Guatemala, Peru and Mexico. Guatemala has maintained its debt level below 30% of GDP since at least 1990. Peru, on the other hand, is a success story, as it managed to reduce its debt levels from extraordinarily high levels in the 1980s. (even close to 100% of GDP) to levels of only 20% of GDP in 2012. From then to date, its debt has grown to 34% of GDP, an increase that is undoubtedly important, but which still maintains its indebtedness at levels reasonably low.
Mexico, for its part, is another success story. After having very high debt levels in the 1980s, it managed to reduce its debt to levels close to 22% of GDP in 2006-07. This debt, however, increased by just over 26 percentage points of GDP between 2007 and 2016, as a result of various episodes of fiscal expansion of public spending in the administrations of Presidents Calderón and Peña Nieto. From then to date, the debt has remained relatively constant (at around 47% of GDP), which is undoubtedly an example of fiscal prudence. Prudence, which may have been excessive during the pandemic crisis, but which has now allowed Mexico to position itself as one of the countries with the most comfortable fiscal situation within the countries of the region.
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