Costa Rica's Fiscal and Political Sickness

The ICEFI points to a "chronic political inability to achieve comprehensive fiscal agreement" which is jeopardizing the sustainability of the state in the medium and long term.

Thursday, October 20, 2016

From a statement issued by the Central Institute for Fiscal Studies (Icefi):

The Central American Institute for Fiscal Studies -Icefi- assessed Costa Rica's budget for 2017, and as a result believes that if the prospects for medium and long term fiscal insufficiency are maintained, there is a serious risk of losing the social achievements of this Central American nation and accumulating fiscal deficits and public debt that could jeopardize the sustainability of the state in the medium and long term. Finally, he reiterated the need for a comprehensive fiscal agreement to ensure economic growth and social welfare in the country. 

The analysis considers that there are five key issues that must be addressed with priority by the tax authorities of Costa Rica First, rigidities in spending without accurate source of funding. The budget includes an increase of 12.1% over the current one, however, most of it is derived from judicial and constitutional provisions requiring increased spending to address social categories included in the legislation, but without establishing the source of funding; and for an increase in debt servicing reaching 8.7% of GDP. The Icefi believes that Costa Rica should avoid establishing programs that lack appropriate sources of income. In the short term the executive and legislative bodies urgently need to seek alternative sources of income, preferably taxes and progressive approaches in order to avoid sharp increases in debt.



More on this topic

Growing Fiscal Risks in Central America

August 2016

The countries facing the greatest risk of fiscal unsustainability within three years are El Salvador and Honduras, followed by Costa Rica and with less risk, Nicaragua and Panama.

From the  "Economic Outlook" section of the V Report on the State of the Region 2016:

Costa Rica as Seen by the OECD

June 2016

The organization says there is an urgent need to raise revenue and reduce expenses, "including the public sector wage bill, which is growing rapidly."

The report "Economic assessment of Costa Rica 2016" by the Organisation for Economic Co-operation and Development (OECD) highlights the fiscal problem as the main challenge for the country on its way towards accession to the bloc. 

Main challenges and key recommendations for 2016-17:

Challenge:
Tax revenues are low and spending is increasing rapidly, pushing public debt to high levels. Public administration is highly fragmented and the Ministry of the Treasury has limited control of the total public expenditure.

Recommendation:
Reducing the central government deficit by 2% of GDP during 2016-17 and then an additional 1.5%, approving and implementing the proposed tax reform, combating tax evasion, removing tax exemptions that have no economic or social justification, and containing expenditure growth.
Introducing a medium-term fiscal framework with a clear and verifiable rule for expenses.
Improving efficiency in public spending by strengthening the authority of the Ministry of Finance to control overall public sector spending and introducing a results-based budget.

Read full report "Visión General Costa Rica 2016" and "OECD Economic Surveys: Costa Rica 2016"

El Salvador Needs Comprehensive Tax Reform

February 2016

After the dollarization in 2001 "... fiscal policy became the only tool the state could use to promote economic growth and improve living conditions for the population."

From a statement issued by the Central Institute for Fiscal Studies (Icefi):

Icefi reiterates the need for comprehensive tax reform

A Cry in the Fiscal Night for Costa Rica

October 2014

"The defense and strengthening of the rule of law requires, as a starting point, enabling sound public finances. The rest is verbal pyrotechnics." Otton Solis.

EDITORIAL

Costa Rica is subject to a rare political situation, where the founder of the party in power and his first deputy, defends rationality as a tool of governance and for managing public finances, in the face of voluntarism in the matter on the part of the Executive, which adds more risk to the serious threat of the fiscal deficit inherited from previous governments, presenting a budget that increases state expenditures by 14%.

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