IDB says LatAm must raise tax revenue, while Paraguay looks to keep low levies

Governments in Latin America must strive to raise tax revenue in order to respond to demands for increased social spending, according to the Inter-Development Bank (IDB).

However, authorities in Paraguay are actually looking to keep tax rates low to attract more investment and promote economic growth.

“Political leaders must understand that increased spending to respond to social demands must be correlated with public revenue. Fiscal management is complex, especially as debt levels are rising, but our countries must establish a stable path for fiscal policy,” said Eric Parrado, the IDB’s chief economist and general manager of its research department. 

The bank expects debt levels across Latin America and the Caribbean (LAC) to remain above pre-pandemic levels in the medium term, at an average 73% of GDP, in the absence of meaningful fiscal reforms. 

This situation, alongside a slowdown in economic growth, creates a “very dangerous vicious circle, weak economic growth slows down poverty reduction and sows distrust towards the economic model,” Parrado warned during the 6th Korea-LAC Business Summit held in Seoul.

During the same panel, Paraguay’s deputy minister of investments and exports, Estefanía Laterza, instead argued that her country’s low tax rates were an advantage to attract investments and promote economic growth.

“This is not the time to put more weight on taxpayers' shoulders and we should rely more on the private sector’s participation,” she stated.

The Paraguayan government’s current fiscal efforts are focused on rebalancing debt and increasing the formalization of the tax system to cover more citizens. 

“We want people to be in the system first and then we’re going to discuss how to finance things,” she said.

In its 2023 budget bill, the government estimates that tax revenues will increase 9% next year, but the tax burden would remain at around 10.4% of GDP, the lowest in South America, due to “the public spending rationalization policy that we began in prior years, with clear restrictions on non-priority expenditures,” reads the statement introducing the bill. 

Despite this fiscal tightening, the public works ministry (MOPC) is calling on congress to increase the fiscal deficit target for 2023 to 2.3% of GDP from 1.3% in order to raise investments by US$200mn.

That figure involves projects that already have financing but which were not included in the budget bill.

At the same time, the MOPC is also pushing a US$1.5bn PPP agenda for infrastructure and seeking financing from multilateral lenders to finance infrastructure projects. 

INVESTMENT OPPORTUNITIES WITH SOUTH KOREA

On the sidelines of the conference, the IDB released a report identifying potential areas of economic cooperation between Latin America and the Caribbean and South Korea. 

Some of the areas that the bank points to as having potential include food security, clean energy development and climate change. 

"For instance, Korea could contribute significantly by utilizing its innovation system to bolster LAC’s attempts to harness new digital and microbial technologies to raise agricultural yields. On the other hand, LAC is the world’s largest net exporter of food and agricultural products. It is also one of the most productive, an opportunity to stabilize and reduce global food prices, which would be favorable for Koreans and others,” the report reads. 

In the case of energy, the bank highlighted that Korea passed the world’s first green hydrogen law, which with the country’s state-owned power utility KOGAS plans to invest US$27bn overseas by 2040 to establish generation facilities that produce green hydrogen. 

The IDB pointed out that Latin America and the Caribbean is one of the most competitive destinations for these investments because of the large areas of land available and generally abundant water.