A Fiscal Rule to Achieve Debt Sustainability in Colombia

Abstract

In order to enhance fiscal sustainability and regain “investment grade” credit rating, in 2011 Colombia implemented a fiscal rule (FR) on the Central Government's structural balance. Investment grade was rapidly attained, and FR targets were complied with, until 2019. Using the Synthetic Control Method, we provide evidence that the FR promoted fiscal discipline. Nevertheless, public debt has increased continuously and is now expected to exceed 60 percent of GDP, in large part driven by the pandemic. We argue that the FR should be reformed so as to incorporate a debt anchor. Using a regime change model and the IMFs buffer risk methodology, we show that the prudent debt level should not exceed 48 percent of GDP and that in order to achieve this in the medium term, a policy mix increasing revenues to 17.8 percent of GDP (from 15.5 percent during 2016-2019) and reducing primary expenditure to 15 percent (from 16 percent during 2016-2019) is required. FR's performance would also benefit from changes in its institutional design.

Fiscal Rules: Challenges and Reform Opportunities for Emerging Markets

“…Ex post, those assumptions turned out to be exceedingly optimistic and as a result, fiscal policy was on average significantly more expansionary than what it should have been, and the rule did not prevent debt from growing during the period as originally intended. Moreover, fiscal policy remained procyclical even after the rule was implemented (Arbeláez et al, 2021).…”

Instituciones fiscales en los países de la Región Andina y retos derivados del proceso de descarbonización

“…Esta cláusula de escape fue utilizada por las autoridades económicas en 2020 debido a los gastos extraordinarios necesarios para hacer frente al choque generado por la pandemia del COVID-19. Aunque las autoridades fiscales colombianas siempre cumplieron con los objetivos establecidos por la regla, la deuda pública se incrementó de forma continua desde el establecimiento de la norma (ver Arbeláez et al, 2021). Este comportamiento se explica, en parte, por los ajustes cíclicos, permitidos por la regla, realizados durante distintos años.…”

Numerical Compliance with Fiscal Rules in Latin America and the Caribbean

“…For example, several articles study Latin American countries' fiscal framework and fiscal rules. Some examples include Argentina (Artana, Moskovits, Puig, & Templado, 2021), Brazil (Bonomo, Frischtak, & Ribeiro, 2021), Chile (Rodrigo, Schmidt-Hebbel, & Soto, 2021), Colombia (Arbeláez, Benítez, Steiner, & Valencia, 2021), Peru (Mendoza Bellido, Vega, Rojas, & Anastacio, 2021, or more broadly, the book Reglas Fiscales Resilientes en América Latina (IDB, 2020). In addition, the secretariat of the European Fiscal Board presents updated and detailed information on the fiscal rules implemented by the members of the European Union (EU) derived from the Stability and Growth Pact (SGP).…”