A Fiscal Rule to achieve debt sustainability in Colombia

María Angélica Arbeláez (), Miguel Benítez (), Roberto Steiner () and Oscar Valencia

No 18557, Informes de Investigación from Fedesarrollo

Abstract: In order to enhance fiscal sustainability and regain the “investment grade” credit rating lost in 1999, Colombia implemented a fiscal rule (FR) in 2011 on the Central Government´s structural balance. Although investment grade was attained, public debt has increased continuously and is now expected to exceed 60% of GDP in 2020 as a result of the COVID-19 pandemic. We argue that although the FR has proved to be an important tool to promote fiscal discipline, it can and should be improved. We undertake several quantitative exercises in support of reforming the current FR so that it incorporates a debt anchor. First, using the synthetic control approach we show that, notwithstanding the observed increase in debt, the situation would have been worse in the absence of the FR. In the same vein, we show that despite the decline in public investment observed since the oil shock in 2014, the contraction would also have occurred in the absence of the fiscal rule. We then estimate a prudent debt level using a regime-change approach and the IMF´s buffer-risk methodology and simulate the trajectory of the FR in the medium term, incorporating a debt anchor and conditioned on different growth scenarios and additional expenditure related with the pandemic. We show that the prudent debt level should not exceed 48% of GDP and that in order to achieve this level in the medium term, a policy mix increasing fiscal revenues to 17,8% of GDP (from 15,5% during 2016-2019) and reducing primary expenditure to 15% (from 16% during 2016-2019) is required. Along with including a debt anchor, FR’s performance would also benefit from changes in its institutional design.

Keywords: Regla Fiscal; Deuda Pública; Política Fiscal; Colombia (search for similar items in EconPapers)
JEL-codes: E37 E62 H30 H42 H60 (search for similar items in EconPapers)
Pages: 49
Date: 2021-02-26
New Economics Papers: this item is included in nep-lam and nep-mac
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Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/11445/4041

Related works:
Journal Article: A fiscal rule to achieve debt sustainability in Colombia (2021)
Working Paper: A Fiscal Rule to Achieve Debt Sustainability in Colombia (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000124:018557

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