Latin America and Caribbean governments could do more on budget management, public sector pay equality

Mexico City, June 23, 2014.- Latin American and Caribbean countries need to do more to improve budget management, tax collection and public sector pay equality if they are to catch up with advanced economies in terms of government performance, according to a joint report by the OECD and the Inter-American Development Bank (IDB).

Government at a Glance: Latin America and the Caribbean finds that around half the 17 countries examined have introduced innovative new budget tools, including fiscal rules or stabilisation funds, which added a layer of protection during the global economic crisis.

Yet more could be done to improve the overall management of public finances, public sector hiring and pay, and public procurement practices, it says. This could help raise living standards, strengthen public services and protect against future economic shocks.

For example, the report reveals the level of inequality in public sector pay, with top managers paid much more relative to other staff than in OECD countries. The first such cross-country comparison on public sector compensation shows top managers are paid 11 times average income, as measured by per-capita GDP, versus 6 times in OECD countries.

“Good government practices are critical for economic development, resilience and overall wellbeing,” said Edwin Lau, head of public sector reform at the OECD, presenting the report in Mexico City. “This shows us exactly where Latin American and Caribbean governments have made progress and where there is still work to do”.

“While the region has made important innovations in public financial management in the last decade, such as the adoption of performance based budgeting, governments must still focus on generating fiscal space to increase much-needed expenditures in poverty reduction programs, basic infrastructure, and mitigation of economic shocks”, said Gustavo Garcia, Principal Fiscal Economist of the Fiscal and Municipal Management Division at the IDB.

The report examines 17 countries in 31 areas, showing how Latin American and Caribbean (LAC) governments are performing relative to each other and next to the OECD average.

Its findings include:

- LAC countries have small public sectors, with public employment accounting for 10.7% of the labour force compared with an OECD average of 15.3%. While a lean public sector is a good thing, a certain size is needed to provide adequate services.

- Ten LAC countries have introduced fiscal rules, and many have added stabilisation funds to cover cyclical price swings in commodities. Eight LAC countries have brought in medium-term spending frameworks for a longer-term budget outlook.

- LAC government revenues equal 25.6% of GDP versus an OECD average of 41.9% and spending averages 27.8% of GDP versus 45.2% in OECD countries. This is due in part to a low level of tax collection. Tax evasion and non-progressive tax structures are major challenges.

- Public employees earn less than they would in advanced economies, although they tend to do better than private sector workers. Wide pay gaps mean senior managers earn 6.7 times what secretaries earn compared with 4.6 times in OECD countries.