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Fiscal tightening should follow cenbanks' heavy-lifting
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Good governing can reverse erosion of trust
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Rich should pay more taxes
April 12 (Reuters) - After central banks across Latin America and the Caribbean raised rates to battle inflation, the International Monetary Fund is now pointing at less spending from governments to help slow down price pressures - while reminding the region's rich to pay more taxes. "Fiscal policy can help monetary policy in reducing demand pressures," the IMF said in a blog post on its outlook for the region's economy. The fund said the fall in headline inflation in the region's largest economies to 7% in March from 10% in mid-2022 is mainly due to declines in commodity prices, while core inflation, which excludes food and energy, remains high. Employment is above pre-pandemic levels, output is at or above potential, and short-term inflation expectations exceed central banks’ targets, the fund said. "Strong domestic demand, rapid wage increases, and broad-based price pressures all point to a risk that inflation in the region could remain unacceptably high."
COOL THE LABOR MARKET
Regional government spending has fallen from its pandemic
levels and is at a point the fund calls "neutral," but says it
is time for "a more contractionary fiscal stance" that would
help slow domestic demand and take pressure off high interest
rates.
"Policies should be aimed at restraining demand to bring it
back into line with potential output. This will inevitably
require cooling the labor market."
However, with softer jobs the need for social spending will
remain high, the IMF said. Progressive tax laws and efficient
governing can help.
"Rebalancing policy will not be easy," the fund said, adding
that there are "serious distributional and social equity issues
to contend with. Enacting tax policies that require the wealthy
to pay their fair share should be part of the solution."
Spending better means spending with more efficiency and
transparency, key points in a region often plagued by
corruption.
"There is important scope to reduce inefficiencies in public
spending, and people are more likely to embrace more prudent
public finances if services are provided with greater
efficiency," said the IMF.
"Being good stewards of taxpayer resources could also help
reverse the erosion of trust in government that many countries
have suffered over the last several years."
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(Reporting by Rodrigo Campos; Editing by Daniel Wallis)
