Alvarado administration celebrates the approval of the tax reform in Costa Rica by announcing a series of initiatives that include, among other things, a public employment reform Project.
After a year of proceedings in Congress and after having been reviewed by a Constitutional Chamber, the country's Assembly finally approved file 20.580. By endorsing this project, the government intends to strengthen its public finances through changes made to the taxation system.
The Ministry of Finance in Costa Rica has announced that between today and August 3 it will try to raise, through means of a direct issue in the local stock market, about $879 million.
Authorities reported that two issues of securities will be offered for sale on the Siopel platform of the National Stock Exchange.The first, of $284 million, will have a gross rate of 9% with maturity in 2020, and the second of $595 million, with a gross rate of 10.79% with maturity in 2028.
Although insufficient, the package of government spending containment measures proposed by the Alvarado administration is a good first step on the way forward to resolving Costa Rica's delicate fiscal situation.
The Minister of Finance, Rocio Aguilar, presented before the Legislative Assembly a plan to contain government spending that includes, among other measures, decreeing "...
In one of the regions that receives the least amount of taxes in the world, the tax burden remained relatively stable in 2017.
From the section Fiscal Outlook for Central America, from the report "Macro-fiscal Profiles: 9th edition", by the Central American Institute of Fiscal Studies (Icefi):
In 2017, the fiscal trajectory of countries in the region remained relatively constant with respect to what was observed in 2016.The following are highlighted as policy orientations: a) lack of political agreements, which transformed into a real impossibility of increasing tax revenues through tax reforms or strengthening the administrative capacity of tax administrations, and b) implementation of austerity programs, which in several countries had a greater impact on capital expenditures, in order to avoid an increase in the fiscal deficit and public sector debt.
The fiscal deficit closed the first half of the year at 2.4% of GDP, up from 2.2% of GDP in June 2016, mainly due to an increase in the financial cost of debt.
From a statement issued by the Ministry of Finance:
At the end of the first half of 2017, the primary deficit (difference between income and interest-free expenses) remained similar to the previous year, at 0.9% of GDP.
The favorable conditions in the global economy allowed the country to grow by 4.25% in 2016, and administrative efforts to reduce the fiscal deficit were noted, however they will not prevent the debt /GDP ratio from growing.
From a press release by the IMF:
Costa Rica’s economy growing robustly, GDP expected to growth by 4.25% in 2016
More needs to be done to stabilize public debt levels
Key for government and Congress to reach consensus on VAT and income tax reforms proposals to help address fiscal imbalances
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.
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 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 "EconomicOutlook"section of the V Report on the State of the Region 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.
From 2014 to 2015 the size of central governments remained constant at an average 18.5% of gross domestic product (GDP).
From the introduction of the report: "Macrofiscal Profiles: 6th Edition" by the Central American Institute for Fiscal Studies (Icefi):
2015 proved to be a period of low tax advance for the Central American region. On average, the size of central governments remained constant compared to 2014, at 18.5% of gross domestic product (GDP). However, not all nations maintained this trend in the same way. While the governments of Nicaragua, Costa Rica and El Salvador, some of the largest fiscally in the region, continued to increase their participation in the economy, reporting increases of 1.5, 0.7 and 0.7% of GDP, respectively, the Government of Guatemala - one of the smallest in the world became even smaller, being reduced by 1.2% of GDP. For its part, the Government of Honduras reported a small decrease of 0.2% of GDP, fully converged with its policy of fiscal austerity, while that of Panama had a transient contraction of 1.4%, reflecting a reorganization established by the new administration and that, according to the plans for 2016, will be reversed in full.
As in old fashioned patriarchal homes, if there must be suffering, the first to suffer are the stepchildren, and only afterwards, if necessary, the legitimate children.
EDITORIAL
The announcement by the Solis administration that it has a plan B in case it does not manage to get legislative approval for the proposed tax increases designed to address the serious and growing fiscal deficit, highlights the existence in Costa Rica of first class citizens and second class citizens.
Treasury data shows that in respect to income tax on legal persons, there was a 70% shortfall on potential revenue, representing 4.23% of GDP.
"... We are still finding fraud, smuggling, omissions, arrears and taxpayers taking advantage of weaknesses in our laws, they are still looking for ways to default on their obligations, therefore we are trying to improve controls and our tax laws," said Helio Fallas, Minister of Finance in Costa Rica.
"Fiscal accounts for 2015 anticipate an additional burden of concerns about the sustainability of the public finances of the governments of the region."
From a report entitled "Macrofiscal Profiles: 3rd Edition" by the Central American Institute for Fiscal Studies (Icefi):
The close of fiscal year 2014 has left more uncertainties than certainties in the current panorama for Central America.
"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%.
From January to November 2013, the fiscal deficit reached $2.270 billion, 4.6% of the national production, 25% more than that accumulated up to November 2012.
Market Pulse Blog Aldesa:
Costa Rica: How much does the government borrow per day?
Every day operations made by the Government, and therefore by all Costa Ricans, add up to an additional ₡1.796 million of new debt.