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Uruguay Fiscal Policy
The civilian government that entered office in 1985
faced a
severe fiscal problem: the chronic public-sector deficit.
It also
faced a broader difficulty: an economy in deep recession.
The
deficit was believed to be perpetuating inflation.
Inflation, in
turn, prevented the economy from reaching a stable
position
conducive to renewed growth. Thus, the priorities of the
Sanguinetti administration's economic plan--devised in
cooperation with the International Monetary Fund
(
IMF--see Glossary)--were to reduce the deficit, bring down
inflation, and
improve the balance of payments.
These multiyear fiscal measures were considered
essential for
renewed growth, but the serious consequences of the
recession
called for immediate action to spur economic activity.
Between
1981 and 1984, the recession had taken its toll on all
sectors of
the economy. GDP had declined by almost 17 percent;
agricultural
production by 12 percent; manufacturing by 21 percent;
construction by 48 percent; and capital formation
(investment) by
56 percent. Workers were especially hard-hit by the
decline.
Between November 1982 and March 1985, real salaries fell
by 19
percent. In real terms, workers only earned half of what
they had
earned in 1968, and unemployment had increased to 13
percent.
Unable to ignore these signs of distress, the Sanguinetti
administration also adopted an economic growth policy.
Initially, the stabilization effort took precedence
over
efforts to boost economic activity. The idea was to break
the
inflationary momentum of the economy first and restore
growth
second. In fiscal terms, the goal was to reduce the
public-sector
deficit from 10 percent of GDP in mid-1985 to 5 percent of
GDP by
1986. The scope of government involvement in the Uruguayan
economy meant that the public-sector deficit had to be
attacked
on three fronts: the central government, by reducing
expenditures
and increasing revenues; the Central Bank of Uruguay,
which
accounted for about half of the deficit; and the state
enterprises, many of which had run small deficits through
most of
the 1980s.
The results of the stabilization effort were ambiguous.
On
the one hand, the Sanguinetti government easily reached
its
fiscal targets. During its first two years in office, the
government enacted tax increases that raised real
government
revenues by 58 percent. Meanwhile, real expenditures
increased by
only 43 percent (see
table 10;
table 11;
table 12,
Appendix). As
a result, the public-sector deficit declined to about 3
percent
of GDP, better than the government had planned.
Simultaneously,
however, inflation--the underlying target of the
government's
fiscal policy--hardly slowed at all. Inflation went from
an
annual rate of 72 percent in 1985 to 57 percent in 1987,
but it
increased to 85 percent in 1989. The persistence of
inflation in
the face of fiscal restraint did not reflect a failure of
the
Sanguinetti government's fiscal policy; rather, inflation
persisted because of the government's monetary and
exchange-rate
policies, the instruments it used to promote economic
growth
(see Monetary and Exchange-Rate Policy
, this ch.). Fiscal
policy was
also inadequate because the government expanded the money
supply
to pay for the fiscal deficit (8.5 percent by the end of
1989).
Data as of December 1990
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