Fiscal Space for Investment in Infrastructure in Colombia Rodrigo Suescún The World Bank January...
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Fiscal Space for Investment in Infrastructure in Colombia
• Motivation• Main Features of the Model• The Model• Simulation Results• Creating Fiscal Space
Fiscal Space for Investment in Infrastructure in Colombia
Motivation:• In many countries productive public investment has been compressed in the process of fiscal adjustment• Public investment contraction may entail a growth cost – unless offset by private initiative, which has not been generally the case• This trend is not apparent in Colombia
Latin America: Public Investment in Infrastructure(weighted average of 7 countries, percent of GDP)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
%
Total Roads plus Rails Power Water Telecommunications
Note: 7 Latin America countries, ARG, BOL, BRA, CHL, COL, MEX, PER.
Latin America: Investment in Infrastructure (public + private) (weighted average of 7 countries, percent of GDP)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
%
Total Roads plus Rails Power Water Telecommunications
Note: 7 Latin America countries, ARG, BOL, BRA, CHL, COL, MEX, PER.
Fiscal Space for Investment in Infrastructure in Colombia
Motivation:
• Evaluation of Macroeconomic Policies in Colombia:
Financial Programming Model
Fiscal Space for Investment in Infrastructure in Colombia
Motivation:Financial Programming Model • Growth rate is exogenous, independent of policies• Timing of policies is irrelevant• Expectations play no role• No foward looking behavior• No purposeful behavior
Fiscal Space for Investment in Infrastructure in Colombia
Motivation:Financial Programming Model • Focus on fiscal deficit and gross debt targets: distinction between current and capital spending is irrelevant• Bias against public capital formation • Static framework vs asset-creating nature and intertemporal trade-offs involved in public investment decisions:
Fiscal Space for Investment in Infrastructure in Colombia
Motivation:Concerns• Already high public debt (54% of GDP in 2003)• Actual fiscal position (Overall budget deficit in 2003: 3.1% of GDP in consolidated)• Future unfunded state pension deficit Risk• Fiscal adjusment using capital spending (inflexible budget)
Fiscal Space for Investment in Infrastructure in Colombia
General Objective:• Construct a dynamic general equilibrium
model to study economic behavior under alternative fiscal policies
• Two forces explain off-steady state dynamics1) Fiscal polices (perfect foresight)2) Current policies and economy off their steady
state sustainable balanced growth path
Main Features of the Model• Small open economy• Two goods: home & foreign goods• Agents: household, firms and government sector• Central gov: current and capital spending, taxes on
labor and capital income and consumption and domestic debt
• Rest of gov: operates infrastructure, current and capital spending and budget surplus target to improve combined public sector finances
• Upward-sloping supply of funds
Model
• Three reproducible factors: infrastructure capital, business capital and human capital
• Infrastructure capital
sss
1gt
spt
sst })S)(-1()S({S
)S,S(Ψ-I+S)δ-1(=S p1-t
pt
shst
p1-t
spt
rgt
cgt
g1-t
sgt I+I+S)δ-1(=S
Model
• Business Capital
• Human capital
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Model
• Household’s Problem
Budget constraint
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mt
mt
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Model
• Household’s Problem
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spt1t
ktt
kt1tttt
wmt
htt
ctt tw
Model
• Government
cgt
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rgt
rgt
gt
gt
rgt
rgtt
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rgt TROSIGpBrB
11 )()1(
Model
• Resource Constraints
• Upward-sloping supply of resources
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BBrr exp
Parameter Description Value
share parameter in CES consumption function 0.8826
parameter determining elasticity of substitution between consumption goods -0.2200
share parameter in CES investment function 0.3369
parameter determining elasticity of substitution between investment goods -0.2200
weighting parameter for the disutility of working time 5.9713
parameter determining intertemporal elasticity of substitution in labor supply 1.6000
scale parameter in CES investment function 1.8680
subjective discount factor 0.9410
rate of depreciation of business capital stock 0.0353
rate of depreciation of infrastructure capital stock 0.0400
foreign borrowing rate 0.0400
semi-elasticity sovereign yield spread to government debt to output ratio 1.3000
capital share parameter in the production function 0.2331
infrastructure capital share in the production function 0.1408
share parameter in CES infrastructure capital aggregator function 0.4784
coefficient determining elasticity of substitution between public and private infrastructure 3.0000
rate of depreciation of human capital stock 0.0400
knowledge acquisition rate 0.0006
infrastructure capital aggregator scaling parameter 1.9995
production function scaling parameter 32.5102
Calibrated Parameter Values
Table 1
ii
i
ks
ss
sy
h
r
(% of GDP) (%)Tax revenue 14.1 Tax ratesNontax revenue 1.5 Consumption 12.0Total revenue 15.6 Corporate income 26.3
Personal income 0.9Current expenditure 16.0Infrastructure investment 0.6Primary expenditures 16.6
(% of GDP)Primary surplus -1.0 DebtInterest payments (approx) 4.4 Central government gross debt 54.0Overall budget surplus -5.5
(% of GDP)Return on infrastructure capital 7.1Other revenue (adjustment factor) 5.4Total revenue 12.6
Expenditures (contribution to GDP) 8.0Infrastructure investment 2.2Primary expenditures 10.2
(% of GDP)Primary surplus 2.4 DebtNet Interest payments 0.0 Rest of government net debt 0.0Overall budget surplus 2.4
(% of GDP) (% of GDP)Primary surplus 1.4 DebtInterest payments (approx) 4.4 Public sector net debt 54.0Overall budget surplus -3.1
Consolidated Public Sector
Benchmark Fiscal Policy Stance (2003)Table 2
Rest of Public Sector
Central Government
Figure 1
Benchmark Fiscal Policy Stance
Figure 1
Benchmark Fiscal Policy Stance
Figure 1
Benchmark Fiscal Policy Stance
Benchmark Fiscal Policy StanceFigure 1
Central government spending(share of GDP)
15%
16%
17%
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
Central government investment in infrastructure
(share of GDP)
0.0%
0.5%
1.0%
2004
2007
2010
2013
2016
2019
2022
2025
2028
Rest of government investment in infrastructure
(share of GDP)
1%
2%
3%
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
Consumption tax rate
11%
12%
13%
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
Capital income tax rate
25%
26%
27%
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
Labor income tax rate
0.0%
1.0%
2.0%
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
Figure 2ABenchmark Economy Transition Path: Macroeconomic Aggregates
Macroeconomic aggregates(share of GDP)
0%20%40%60%80%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Consumption Investment
Trade balance(share of GDP)
-2.0%
-1.0%
0.0%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
External debt(share of GDP)
40%
60%
80%
100%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
GDP growth rate
3.0%
3.5%
4.0%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Private investment in infrastructure(share of GDP)
2%
3%
4%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Private investment in business sector(share of GDP)
8%
9%
10%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Figure 2BBenchmark Economy Transition Path: Fiscal Position
Central government accounts(share of GDP)
-30%
-20%
-10%
0%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Primary Surplus Overall budget surplus
Consolidated public sectorprimary surplus(share of GDP)
0%
1%
2%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Consolidated public sectoroverall budget surplus
(share of GDP)
-15%-13%-11%-9%-7%-5%-3%-1%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Central government gross debt(share of GDP)
40%
90%
140%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Public sector net debt(share of GDP)
40%60%80%
100%120%140%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Sources: From 2004-2050: Departamento Nacional de PlaneaciónFrom 2051-onward: Extrapolation
Future State Social Security DeficitsFigure 3
(% of GDP)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2004
2010
2016
2022
2028
2034
2040
2046
2052
2058
2064
2070
2076
2082
2088
2094
2100
Figure 4ATransition Path under the Adjusted Fiscal Policy Stance: Macroeconomic Aggregates
Consumption(share of GDP)
57%59%61%63%
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Benchmark
Trade balance(share of GDP)
-2.0%
0.0%
2.0%
4.0%
6.0%
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Benchmark
Growth rate
3.0%3.2%3.4%3.6%3.8%4.0%4.2%
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Benchmark
Investment(share of GDP)
3%
8%
13%
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Benchmark
External debt(share of GDP)
40%60%80%
100%
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Benchmark
Private investment in infrastructure(share of GDP)
0.0%1.0%2.0%3.0%4.0%
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Benchmark
Private investment in business sector(share of GDP)
1%3%5%7%9%
200
4
200
5
200
6
200
7
200
8
200
9
201
0
2011
201
2
201
3
201
4
Benchmark
Long-run growth rate
3.0%3.2%3.4%3.6%3.8%4.0%4.2%
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
20
20
20
22
20
24
20
26
20
28
20
30
20
32
20
34
Benchmark
Figure 4BTransition Path under the Adjusted Fiscal Policy Stance: Fiscal Position
Central governmentprimary surplus(share of GDP)
-6%
-4%
-2%
0%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Benchmark
Central government gross debt(share of GDP)
40%
140%
240%
340%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Benchmark
Central governmentoverall budget surplus
(share of GDP)
-60%
-40%
-20%
0%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Benchmark
Tax revenue(share of GDP)
10%11%12%13%14%15%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Benchmark
Consolidated public sectoroverall budget surplus
(share of GDP)
-40%
-30%
-20%
-10%
0%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Benchmark
Public sector net debt(share of GDP)
40%
90%
140%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Benchmark
Source: Ministerio de Hacienda y Crédito Público (2004)
Figure 5A Official Multiyear Economic Program 2004-2020
Final household consumption(% of GDP)
61
62
63
64
65
2004
2006
2008
2010
2012
2014
2016
2018
2020
Investment (% of GDP)
18.5
19.5
20.5
21.5
22.5
2004
2006
2008
2010
2012
2014
2016
2018
2020
Private investment (% of GDP)
12131415161718
2004
2006
2008
2010
2012
2014
2016
2018
2020
Government expenditure (% of GDP)
12
14
16
18
20
22
2004
2006
2008
2010
2012
2014
2016
2018
2020
Growth rate
2%
3%
4%
5%
2004
2006
2008
2010
2012
2014
2016
2018
2020
Public sector net debt(% of GDP)
40
44
48
52
562000
2002
2004
2006
2008
2010
2012
2014
Source: IMF (2004b)
Figure 5B IMF Baseline Projection: Colombia 2004-2010
Investment (% of GDP)
14
15
16
17
18
19
2004
2005
2006
2007
2008
2009
2010
Private investment (% of GDP)
7
8
9
10
11
12
2004
2005
2006
2007
2008
2009
2010
Growth rate
2%
3%
4%
5%
2004
2005
2006
2007
2008
2009
2010
Public sector net debt(% of GDP)
40
45
50
55
60
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Figure 6AEconomy with No Public Spending in Infrastructure: Macroeconomic Aggregates
Consumption(share of GDP)
57%59%61%63%65%
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
New Benchmark
Trade balance(share of GDP)
-2.0%
0.0%
2.0%
4.0%
6.0%
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
New Benchmark
Growth rate
3.0%3.2%3.4%3.6%3.8%4.0%4.2%
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
New Benchmark
Investment(share of GDP)
5%
10%
15%
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
New Benchmark
External debt(share of GDP)
40%60%80%
100%120%
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
New Benchmark
Private investment in infrastructure(share of GDP)
0.0%1.0%2.0%3.0%4.0%
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
New Benchmark
Private investment in business sector(share of GDP)
1%3%5%7%9%
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
New Benchmark
Long-run growth rate
3.0%3.2%3.4%3.6%3.8%4.0%4.2%
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
20
20
New Benchmark
Figure 6BEconomy with No Public Spending in Infrastructure: Fiscal Position
Central governmentprimary surplus(share of GDP)
-6%
-4%
-2%
0%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
New Benchmark
Central government gross debt(share of GDP)
40%
140%
240%
340%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
New Benchmark
Central governmentoverall budget surplus
(share of GDP)
-60%
-40%
-20%
0%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
New Benchmark
Tax revenue(share of GDP)
10%11%12%13%14%15%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
New Benchmark
Consolidated public sectoroverall budget surplus
(share of GDP)
-14%
-9%
-4%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
New Benchmark
Public sector net debt(share of GDP)
40%
90%
140%20
04
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
New Benchmark
Other Features of the Economy with No Public InvestmentFigure 7
User cost of public infrastructure capital
10%14%18%22%26%30%34%
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
New Benchmark
Combined public sector primary surplus(share of GDP)
-8%-6%-4%-2%0%2%4%6%
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
New Benchmark
Public Enterprise Overall Surplus Total DebtISA 0.09 0.61ISAGEN 0.08 0.20CORELCA 0.02 0.11URRA 0.13 0.72CENTRALES ELECTRICAS DE NARIÑO -0.01 0.00ELECTRIFICADORA DEL META 0.00 naELECTRIFICADORA DE SANTANDER 0.00 0.01ELECTRIFICADORA DEL HUILA 0.00 0.00ECOGAS 0.06 naECOPETROL 0.55 0.16TELECOM -0.07 0.10EPM 0.00 0.92EMCALI 0.17 0.39ETB -0.15 0.09EAAB 0.05 0.42ADPOSTAL na naINDUMIL na naSATENA na 0.05
Total 0.93 3.78
Source: CONFISna: not available
Main Public Enterprises with Investment in Infrastructure, 2003Table 3
(% of GDP)