IDB: Waste in Government Spending Costs Latin America and Caribbean Around 4.4% of GDP

WASHINGTON, United States, Thursday September 27, 2018 – An 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 GDP, showing there is ample room to improve basic services without necessarily spending more resources.

That amount reflects 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.

The report, ‘Better Spending for Better Lives: How Latin America and the Caribbean Can Do More with Less’, a report by the Inter-American Development Bank, was launched 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.”

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. Spending ranges from 35 per cent of GDP and above in Argentina and Brazil to below 20 per cent of GDP in the Dominican Republic and Guatemala.

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. The IDB said governments now need to make the most of their tax revenues.

Among the recommendations contained in the report for policymakers are: 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 book 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 organization and efficiency, better management of crime prevention programs, and targeting high-risk places, people and behaviors, among others.

Spending Better for Better Lives’ also looks at intangible elements that underpin budget decisions, such as the level of citizen trust in governments. A lack of trust implies, among other things, that voters will prefer public policies that provide immediate benefits (such as transfers) over investing in education and infrastructure, whose benefits will not be perceived until many years later.

“Pushing for government efficiency is not just about dry, technical considerations,” said fiscal and municipal lead specialist Carola Pessino, who also co-edited the book. “Providing citizens with more information so they can monitor their governments, increasing technical and allocative efficiency so they may get the services they deserve, are actions that will help restore people’s trust in government. They will then demand from their politicians more long-term investments rather than transfers, setting in motion a virtuous circle that produces better policies and better spending.”

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