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Uruguay at a Crossroads: Continued Decline or a Return to Economic Progress? [1]

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Date: 2025-01 

Social Spending and Macroeconomic Policy

One of the most significant developments during the 15 years of Broad Front leadership was the steady increase in social spending (Figure 4). From 2005 to 2019, social spending as a percent of GDP increased from 18.5 percent to 25.8 percent.

Source: Uruguay Ministerio de Desarrollo Social, 2024.

The Broad Front successfully instituted new cash programs and reformed existing social assistance to address long-standing poverty. When the Broad Front won the presidency in 2004, nearly 40 percent of Uruguayans were living below the poverty line.7 Addressing this situation was the top priority for the incoming administration. The new government created various cash transfer programs targeting different segments of the population, including the Tarjeta Uruguay Social (from 2006), the PANES emergency assistance program (2005–2007), and the Plan de Equidad (from 2008). Earlier social assistance programs such as the Asignaciones Familiares (Family Allowances, created in 1943) and the Pensión a la Vejez (noncontributory old age pensions, created in 1919) were reformed as part of the Plan de Equidad to extend coverage to families and individuals in the informal sector.

These cash transfer programs achieved one of the highest coverage rates in Latin America. By 2017–2018, 30.5 percent of people were living in households that were recipients of at least one cash transfer program.8 This was higher than Argentina (26.7 percent), Brazil (26.9 percent), and Paraguay (12.4 percent) and was only surpassed in Latin America by Bolivia (59.9 percent) and the Dominican Republic (32.5 percent). Cejudo, Michel, and de los Cobos, 2020. Figures includes recipients of noncontributory pensions.[/footnote] Cash transfer programs sometimes fail to reach the poorest households; however, by 2019, Uruguay had achieved 94 percent coverage of those below the extreme poverty line — the highest rate among Latin American countries with comparable programs, where the regional average was 48 percent coverage. The Latin American average is unweighted by population size and is the mean of 17 countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Guyana, Honduras, Mexico, Panama, Peru, Paraguay, El Salvador, Suriname, and Uruguay (Stampini et al., 2021).[/footnote]

In 2007, the Broad Front government also established the National Integrated Health System (SNIS), paid for by the newly created National Health Insurance (SNS), representing a major expansion of public health care and integrated public and private providers into a network to ensure equitable, universal access to health care.9 Collectively, the Broad Front’s reforms constituted a major expansion of the welfare state and caused poverty rates to fall dramatically, to 9.7 percent by 2015 and 8.8 percent in 2019, their last year in government.

In contrast, while social spending rose in 2020 as part of the government’s initial pandemic response, it was cut back sharply in both 2021 and 2022 as the new administration of Lacalle Pou implemented fiscal austerity, cemented by the adoption of a new fiscal rule, welcomed by the IMF.10 The new government also introduced a series of conservative reforms to social policy, the most important of which was a 2023 reform of social security that will gradually raise the retirement age from 60 to 65.11

The policy response to the pandemic and the ensuing recession was also more limited than was the case with many of Uruguay’s peers, with smaller spending increases due to the constraints imposed by the new fiscal rule. Pandemic support programs were withdrawn sooner in Uruguay than in neighboring countries. The government created one new cash transfer program (the Canasta de Emergencia) and increased the size of the social benefits paid in two existing programs (the Plan de Equidad Social and Tarjeta Uruguay Social). But the increases to coverage and benefit size were modest compared with other Latin American countries, according to an analysis by the UN Development Programme.12All three of the modified or new cash transfer programs were available to 6 percent or less of the population and provided additional benefits of less than 10 percent of monthly per capita GDP. Cejudo, Michel, and de los Cobos, 2020, Graph 3.[/footnote]Apart from Trinidad and Tobago, all other countries that introduced or modified cash transfer programs either had higher additional payments or made the program available to a broader segment of society. Cejudo, Michel, and de los Cobos, 2020.[/footnote]

Other policies included extending unemployment benefits, sectoral subsidies, and tax deferrals for heavily affected industries. Overall, the primary deficit widened by 1.6 percentage points to -2.1 percent of GDP from 2019 to 2020 (Table 1). This was driven by increased primary spending (excluding interest payments) of 1.8 percent of GDP. This spending increase was more modest than in the other countries of the Southern Cone and was smaller than the Latin American average. From 2019 to 2020, spending in Chile increased by 2.4 percent of GDP, in Argentina by about 6 percent of GDP, and in Brazil by 3.8 percentage points.

Table 1: Relative to Much of the Rest of the Region, Uruguay Spent Less and for Less Time During the COVID Pandemic (% of GDP)

Source: IMF, 2024a. Figures are for general government except for Uruguay which is nonfinancial public sector (NFPS). Note: Paraguay, not shown here, saw primary spending increase by 2.4 percent of GDP from 2019 to 2020 at the central government level (IMF, 2024a, 5 [Table 1]).

Lacalle Pou’s COVID fiscal support — already modest in scale — was rapidly withdrawn, even before the end of the pandemic. Overall primary spending fell by 2 percentage points to 28.2 percent of GDP in 2021; it then rose slightly to 28.6 percent of GDP in 2023 and is set to rise to 29.2 percent in 2024. Social spending, on the other hand, fell by over 3 percentage points of GDP from almost 28 percent in 2020 to 24.5 percent in 2023, beneath the pre-pandemic rate of almost 26 percent.

This tightening was deemed necessary to comply with a new fiscal rule introduced by Lacalle Pou’s administration and approved by Uruguay’s right-wing dominated legislature.13 The new fiscal rule consists of limits to the size of the deficit, to primary expenditure growth, and to the net debt ceiling. Uruguay Ministerio de Economía y Finanzas, 2023.[/footnote] This severe fiscal framework rapidly reduced the net debt ratio, from 57.3 percent of GDP in 2020 to 51.6 percent of GDP in 2022 — about the same level it had been in 2019. IMF, 2024c, 32, nonfinancial public sector; IMF 2022.[/footnote] With interest payments at about 2 percent of GDP, an argument can be made that the prioritization of this goal over other key vital needs was excessive. Notably, the external debt burden was also not a major constraint as interest payments on the external debt averaged only about 1.5 percent of exports from 2020 to 2024 (IMF 2024c). [/footnote] This new fiscal rule had negative ramifications in other areas, including in economic growth and in the slow progress of reducing poverty, which remains above pre-pandemic levels (see below).

After the first confirmed cases of COVID in 2020, monetary policy shifted to an expansionary stance, with the rate of growth of the monetary base increasing by 11 percent in the second quarter of 2020, double what it had been in the first quarter.14 There were also reductions in reserve requirements, and the government extended an existing public credit guarantee scheme to facilitate credit to small- and mid-sized enterprises. Bucacos et al., 2023.[/footnote] These expansionary policies mitigated the impact of the pandemic recession. One modeling analysis estimated that the output gap would have been about 1.4 percentage points wider without this expansionary policy. Output by the end of 2020 would have been -5.5 percent from the trend as opposed to -3.9 percent from the trend (Bucacos et al., 2023).[/footnote]

Monetary policy started tightening early. In September 2020 the Central Bank (Banco Central del Uruguay) shifted to using the interest rate as the main instrument of policy, with an initial reference rate of 4.5 percent.15 Starting in October 2021 — almost six months ahead of the US Federal Reserve and well before the end of the pandemic — Uruguayan authorities began raising rates, with the policy rate peaking at 11.3 percent in 2022. The Central Bank then began reducing rates, to 9 percent in 2023 and 8.5 percent currently, though as inflation has come down, the real rate has actually increased. IMF, 2024c, 31 [Table 1]; BCU, n.d.[/footnote] This policy has contributed to the trimming of headline inflation rates, which fell from a peak of 8.3 percent in 2022 to a projected 5.5 percent in 2024. IMF, 2024c.[/footnote] This negative monetary shock was likely one of the most important determinants of Uruguay’s lackluster growth of just 0.4 percent in 2023 (output is forecast to expand at a faster clip of 3.2 percent in 2024). IMF, 2024e.[/footnote]

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