Fiscal Policy in Latin America for most of the twenty century, was the first hand government tool-kit, for winning elections.So, the fiscal deficit arising from it, implied negative consequences for the economy, as long as it fostered conditions for disestabilization forces such as, volatile economic growth and lower credit worthiness which sooner or later, become also a threath to democracy and its values.Lozano (2008).
Besides, the implications were not just inefficiency and instability .Given the Tinbergen policy rule, the fiscal policy became the missing policy for macroeconomic targets, which none policy makers could count on, other than to sustain deficits. Somehow, policy framework were constrained by steady fiscal deficit to display fully its economcis tools. It follows, that in such a case, fiscal policy failed to fullfil its main focus : Internal stability.
Better coordinated economics policies becomes a goal very hard to get, whether one of the key policy, was not elegible to fit in the coordination framework, which is non neutral for macroeconomic targets as long as assuming a fiscal policy more rational than it really is generates a target bias. It is usual to consider fiscal policy, as an autnomous exogenous variable, but politically willing to move toward stability,therefore capable of adjusting itself to macroeconomics targets.A good example of this approach, is the fiscal policy rules implemented by the European Union, which set a limit of 3% for deficit, which monetary policy can count on.But in Latin America,the situation was different, becasue there was no limit to fiscal deficit, which measured it againt tax incomes ,it usually was well over that percentage range.Therefore, changing the focus of fiscal policy away from short run interest, to focus more on long run purposes,become a matter of either gains or losses of welfare (Gavin, Michael, and Roberto Perotti. “Fiscal Policy in Latin America.” NBER Macroeconomics Annual, vol. 12, 1997, pp. 11–61. JSTOR, www.jstor.org/stable/3585216.).
Thus, on the other side of a coin, fiscal policy based on budget surplus, has implications and consequences for the policy mix and output outcome,specially in a small open economy with free capital flow.Piasecki & Wulf (2014).
The surplus policy, allows higher spending as a countercyclical resource without additional debt, which keep credit worthiness within the range of country risk measured by qualifyng agencies . So, it allows Governement to count further on foreign sources, as substitute to internal borrowing, for financing expected domestic spending. In Latin America Economies, Chilean economy has the most relevant evidence about the impact of such a policy: It became a public surplus country, and net creditor.This led to improve Chile credit worthiness, and made fiscal policy, more effective than some economics model anticipated, for a smal economy with flexible exchange rate and free capital flows .(Piasecki ,2014 et al. On the other side, when government debts increase, interest payments goes up as a proportion of the country’s Gross Domestic Products (GDP).Moreover, the interest payment, imposes an additional burden on the country’s risk level, and the fiscal balances. Besides, it does constraint monetary policy decisions, when it needs to use interest rate as a tool for stabilization purposes.A rise in the interest, means that an higher proportion of government revenues, will cover financial costs, rather than being used for the country’s social and investment needs. The consequence, is a reduction in the economic growth potential.Furthermore, it leave monetary policy in the situation of self inflicted damage.
