Fiscal Rules and the Behavior of Public Investment in Costa Rica and Panama: Towards Growth-Friendly Fiscal Policy?

This paper aims to provide evidence on the effects of fiscal rules on public investment, fiscal results and growth in Costa Rica and Panama. First, we find that the budget formulation process and the political economy behind the adoption and compliance of fiscal rules explain that Panama has a bias to create and sequentially pile up rules, while Costa Rica has a tendency not to comply with them. Second, a retrospective analysis of the 2018 fiscal rules in both nations finds asymmetric effects on the fiscal results. In Panama it is difficult to separate the effect of fiscal rule designs on public investment; and, in Costa Rica, the application of the fiscal rule will decrease public investment, if the debt to GDP ratio exceeds 60 percent and current expenditure crowds out capital expenditure. Two lessons emerge. First, an effective fiscal rule compliance requires time consistent institutions, solid monitoring, enforcement schemes and improving the quality of public financial management systems. Second, it is necessary to review the design of fiscal rules in both countries to ensure they are investment and growth friendly.