Paraguay Public Expenditure Review

Challenge

Paraguay has achieved significant progress in terms of fiscal policy over the past decade. Fiscal consolidation was at the core of the economic stabilization program that contributed to the economic turnaround beginning in 2003. It included an increase in tax revenues through the implementation—albeit partial—of a tax reform package and significant rationalization of expenditures. Despite this progress on fiscal reform, three major challenges remain:

• A volatile macroeconomic environment. Although Paraguay’s recent growth has exceeded its three-decade average, the economy has also become more volatile.
• Insufficient fiscal resources. Spending has been constrained on human development and growth-enhancing policies. For the 2009-2011 period Paraguay’s social expenditure was only around 11% of GDP compared to around 27% in countries like Argentina and Brazil or 23% in Uruguay.
• High levels of poverty and inequality. Despite poverty reduction from 36% in 1997 to 32% in 2011 and GINI coefficient improvement from 49 to 52 for the same period, the incidence of poverty and inequality remains high in international comparison and calls for further improvements. 

Solution

The World Bank team worked with the Ministry of Finance over a period of two years to analyze and design policy options to respond to the challenges of fiscal space creation, improvement of public expenditure efficiency and tax collection efficacy. In parallel to the preparation of the full report and to contribute in a timely manner to policy initiatives, the team shared findings of various technical analyses of the impact of the 2004 tax reforms and the role of the personal income tax. It also built capacity on the analytical tools developed for the PER to ensure that they could be used to inform fiscal policy decisions to support the goal of equitable growth and poverty reduction.

These tools are:

1. A Social Accountability Matrix, a key ingredient of the Computable General Equilibrium (CGE) Model, which includes data from Paraguay’s National Accounts, Fiscal Accounts, Balance of Payments, and Permanent Household Survey, and builds on an Input-Output Table created by the Central Bank;
2. A CGE Model, a tool that allows the Government to assess the distributional and poverty impact of different policy alternatives; and
3. A BOOST database of comprehensive treasury data, which provides disaggregated budget data for all levels of government in a user-friendly format for the years 2003 to 2012.

The BOOST database in particular contributed to capacity building in the Ministry of Finance. It improved the information exchange process within the Ministry and with the line ministries. Following the completion of the PER, Paraguay became the first country in Latin America and the Caribbean region and the fourth in the world to release budget data to the public using BOOST.

Results

Based on the review’s analysis and the related dialogue, the Government has implemented several policy changes.

• In August 2012, the Paraguayan Congress approved the personal income tax, which had been designed as part of the 2004 tax reform. An analysis prepared by the PER team of the impact of the 2004 tax reform and the role of the personal income tax contributed to the policy discussion.
• In October 2013, the Congress approved the fiscal responsibility law. The PER dialogue and analysis also contributed to this policy discussion.

Both laws will help create fiscal space to address the remaining development challenges in Paraguay and increase efficacy and efficiency of tax policies as indicated in the development objective. At the launch of the BOOST database the Minister of Finance spoke of a historical moment for Paraguay. The database allows the public greater scrutiny of public finances and will help increase the efficiency of public expenditures. 

Bank Group Contribution

With a contribution of approximately US$350,000, the Bank’s work conducted as part of the PER involved policy dialogue, detailed analyses, development of tools for policy analysis and expenditure transparency, as well as capacity building.

The work on the Social Accounting Matrix and the CGE model was supported with US$25,000 by the multi-donor Poverty and Social Impact Analysis - PSIA Trust Fund (Assessing the Impact of Fiscal Policies and External Shocks in Paraguay).

Partners

The PER was prepared in close collaboration with the Ministry of Finance, in particular the Vice Ministry of Financial Administration.

Moving Forward

Further dissemination activities for the study including workshops to make the public expenditure review available to the public are planned. The Government has also requested follow-up studies to analyze more in depth the structural fiscal balance for Paraguay.

Moreover, a second phase of the BOOST database is planned, including the revenue side, transfer of knowledge to maintain the BOOST webpage on the Government's server, and develop it further into a high frequency fiscal management tool. The Government has also requested continued training on CGE modeling and an update of the Social Accounting Matrix through 2012 (to be financed by a second PSIA trust fund).

Beneficiaries

The main direct beneficiaries are policy makers in the Ministry of Finance, who received technical analysis, policy recommendations, tools and capacity building, with the aim of strengthening fiscal policy in support of poverty reduction and shared prosperity.