Building fiscal space for stronger, sustainable and broadly shared growth in Peru

By Aida Caldera-Sanchez, Paula Garda and Michael Koelle, OECD.

Available in Spanish

Peru has the opportunity to combine stronger growth with sustainable public finances. Over the past two decades, Peru was among the fastest-growing economies in Latin America, supported by fiscal rules, credible monetary policy, and robust financial supervision. Careful fiscal management boosted living standards, attracted investment, and helped weather repeated shocks. But growth has slowed since the end of the commodity boom, held back by weak private investment and stagnant productivity. At the same time, recent years have seen fiscal deficits exceed the fiscal rule targets, with measures that increase spending without adequate financing, and erosion of the tax base. Unless addressed, these trends risk weakening the strong macroeconomic framework that once underpinned resilience.

As the recently launched OECD Economic Survey of Peru projects, growth will moderate to 2.8% in 2025 and 2.6% in 2026, amid global and domestic uncertainty and close to the economy’s current capacity to grow in the long run. This makes fiscal sustainability even more pressing. With weaker growth, debt is harder to stabilise, and OECD projections show fiscal deficits above rule limits in both years, requiring an additional adjustment of about 0.4% of GDP. Without stronger revenue mobilisation and stricter control of spending, meeting fiscal rules will remain challenging even over the medium term.

Why fiscal space matters

To raise the economy’s capacity to grow in the long run, Peru needs fiscal space to invest in education, social protection, infrastructure and climate adaptation. Without reforms to finance already committed spending, debt ratios will rise steadily even from a low starting point (Figure 1, brown line). By contrast, more efficiency in spending, comprehensive tax reform (yellow line), and an ambitious pro-growth reform agenda (green line) to raise productivity, reduce informality, and strengthen institutions would keep debt on a sustainable path. Together, these reforms would give Peru the means to accelerate income convergence and lift living standards.

Complying with the fiscal rule

The immediate priority is to bring the fiscal deficit back within the rule limits. This is critical to retain investor confidence, keep borrowing costs low, and preserve the government’s ability to respond to future shocks. Returning to compliance can be achieved by controlling current spending—especially payroll, which tends to rise in electoral years—phasing out the diesel subsidy under the Fuel Price Stabilisation Fund (FEPC) and limiting the proliferation of tax expenditures. Ongoing support to Petroperú, the state-owned oil enterprise, must be paired with a credible plan to restore its viability, including aligning with OECD-standard governance for state-owned enterprises (SOEs).

Spending better

Making public spending and investment more efficient should be a top priority. Peru’s government already invests more than many OECD countries and those in the region, but infrastructure quality remains low, while social protection coverage remains incomplete and poorly targeted. The task is to ensure that every sol spent delivers quality services and reaches those most in need. Reorienting resources towards social protection, education, and climate resilience, while strengthening social registries for better targeting, improving project evaluation using systematic cost-benefit analysis, and building the capacities of subnational governments would improve outcomes.

Raising revenues

Higher spending efficiency alone will not be enough. At just 17% of GDP, Peru’s tax revenues are among the lowest in Latin America and far below the OECD average of 34% (Figure 2). This reflects widespread tax evasion, high informality, inefficient tax administration, and a tax structure reliant on VAT and corporate income taxes but weakened by low personal income tax collection and tax expenditures.

Improving the tax administration and advancing a comprehensive tax reform are therefore needed. Strengthening the tax administration means modernising its capacity to ensure tax compliance. Investments in digitalisation, electronic invoicing, data sharing across agencies, and risk-based audits would make oversight more effective. The tax reform should have several elements:

• Systematic reviews of tax expenditures, currently estimated at over 2% of GDP, and sunset clauses to keep only measures with clear social or productivity benefits.
• Simplification of corporate tax regimes for small businesses by replacing multiple overlapping schemes with a single scheme to reduce evasion and encourage business formalisation.
• Expansion of the personal income tax base by gradually lowering the threshold at which individuals start paying and replace firm-size-based social security contributions with progressive contributions based on labour income, lower for low earners, to encourage labour formalisation.

Together with stronger property, environmental, and excise tax collection, these measures would create a fairer, more efficient tax system and broaden the revenue base.

Peru’s challenge is to reignite growth while safeguarding fiscal sustainability. Fiscal rule compliance must go hand in hand with higher spending efficiency, higher revenues, and reforms to raise productivity and strengthen institutions, laying the foundations for long-term prosperity.

For more information: OECD Economic snapshot for Peru.

Reference

OECD (2025), https://www.oecd.org/en/publications/oecd-economic-surveys-peru-2025_76f6eb73-en.html, OECD Publishing, Paris.