WASHINGTON, United States (CMC) — The Inter-American Development Bank (IDB) Monday said a landmark analysis of government spending in Latin America and the Caribbean reveals widespread waste and inefficiencies that could be as large as US$220 billion a year, or 4.4 per cent of the region’s gross domestic product (GDP).
It said that the survey shows there is ample room to improve basic services without necessarily spending more resources.
IDB report titled “Better Spending for Better Lives: How Latin America and the Caribbean Can Do More with Less,” was launched Monday as governments across the region struggle to meet their citizens’ rising expectations with limited budgets.
The publication, part of the IDB’s flagship studies series, Development in the Americas, argues against across-the-board cuts. It looks at whether countries spend too much or too little on different priorities, whether they invest enough to ensure a better future, and whether those expenditures make inequality better or worse.
Along with the diagnosis, the report offers several policy recommendations on how to improve the efficiency of government spending, such as reducing the cost of delays and budget overruns in infrastructure projects, as well as corruption in procurement.
“At a time when governments have to make tough choices, this report provides a timely platform for discussing how efficiently we spend our public resources to ensure the best possible outcomes, not just for the present but for the future,” said IDB chief economist Alejandro Izquierdo, who edited the book.
“The good news is we can improve the lives of our citizens by spending better, rather than by spending more,” he added.
According to the report consolidated public spending averages 29.7 per cent of GDP in Latin America and the Caribbean, almost six percentage points more than in the early 2000s.
Following the 2007-2008 global financial crisis, many Latin American countries rode a commodity windfall and raised their spending on items such as public sector salaries and pensions, which are difficult to dial back. Governments now need to make the most of their tax revenues.
Some of the key findings in the report include moderate estimates of inefficiencies in procurement including losses caused by corruption and delays, excessive civil service payroll and transfers that do not reach the targeted population, could amount to as much as 4.4 per cent of GDP, or US$220 billion enough to eliminate extreme poverty in the region.
The report notes that public investment needed to ensure future growth has lost more than eight percentage points in the budget relative to current expenditure.
It states that while public investment per capita has increased on average more than 50 per cent in every other region in the world, in Latin America it has only crept up five per cent, remaining roughly at the same levels as in the 1980s.
“Latin America and the Caribbean spend four times more on the elderly than its younger cohorts. If current pension and health expenditure regimes are kept in place, their share in the budget could jump form 35 per cent today to as much as 78 per cent by 2065, putting fiscal sustainability at risk and starving other priorities such as developing the job skills and the infrastructure necessary to sustain future economic growth.”
The report notes that more government spending is unlikely to help close the region’s inequality gap if inefficiencies in redistribution are not corrected.
The report contains a wide range of specific recommendations for policymakers, including using more cost-benefit analysis when determining budget choices for better expenditure allocation, as well as the creation of specific agencies for strategic planning that use rigorous evaluations of the impact of government programs before making allocation decisions.
The report also advocates for fiscal rules that go beyond fiscal sustainability to investment protection, such as Peru’s double condition fiscal rule, which sets specific limits to growth in current expenditures, making sure that it will not eat up resources that should be allocated to capital expenditures.
The report lists multiple ways to improve the management of civil service expenditures, from developing comprehensive civil service plans that set clear visions and goals, to headcount and transactional audits.
In education, it recommends, among other measures, accompanying higher spending per student with more accountability measures to reduce corruption, as well as better training and performance pay for teachers.
Regarding public safety, the report notes that the region suffers from high crime levels even though it significantly increased spending on policing and incarceration, with the security sector absorbing 5.4 per cent of fiscal budgets – versus 3.3 per cent for OECD countries.
The report lists improvement areas in police organisation and efficiency, better management of crime prevention programs, and targeting high-risk places, people and behaviours, among others.