Costa Rica: Reform fiscal or tax package?
by Juan Carlos Hidalgo
campaign said he would not talk of more taxes while the economy was found weak, President Laura Chinchilla and his Chancellor of the Exchequer, Fernando Herrero, are on the eve of presenting an ambitious tax package, even when the main indicators of economic activity shows worrying signs of slowdown. The reasons why we find ourselves in a serious fiscal situation - and if the resolution of the Government is right - deserve a debate this year.
First it must be clear that acute fiscal deficit of the country - the largest in Latin America according to the ECLAC - has been caused by an increase in excessive public expenditure in the past three years, and not by a decline in income as wanted it to present the Minister Smith.
In fact revenues from the central Government as a proportion of GDP fell in less than 7% from 2008 to 2010, while spending grew during this period a 28.7% - an increase unprecedented in the last 30 years-.
Therefore, any solution to the fiscal problem must necessarily start to control the increase in public expenditure, since otherwise the new taxes will be allocated to pay for more spending and the country will continue on the same path of fiscal instability.
Increase in spending
Unfortunately, the Chinchilla Administration does not sample of austerity: the regular budget for the 2011 - the first produced by this Government - spending increases 10% in real terms over the previous year.
Minister Smith still has not submitted to the Legislative Assembly tax bill, but its main components are outlined in a presentation yours entitled "A tribute to Costa Rica: towards a proposal for tax reform". The content of this serves to prove that what he wants the Government is not a comprehensive fiscal reform to solve the financial problems of the country definitively, but it is a simple package of taxes that would serve as a patch to reduce the fiscal deficit in the short term, in the best cases without even aspire to eliminate it.
Just look at the numbers: as data of the Comptroller General of the Republic, revenue in 2010 have amounted lip service to 14.8 per cent of GDP, while expenditures amounted to 20.2 per cent. Even if tax Herrero project reached its objective of raising revenue at 2.5% of GDP - which is a big assumption given the background of other taxes--the gap between income and expenditure packages is so broad that it would leave a significant fiscal deficit. Worse still, this will exacerbate quickly if, as indicated by the evidence, the Government is unable to escape this maelstrom of spending.
Proof of this is that the 32 slides of the presentation in Herrero, only two refer to public expenditure (the rest talk about tax increases): the first indicates a structural reduction in spending equivalent to 2% of GDP would imply either the Elimination of 25% of the State payroll, the cessation in the payment of interest on the debt, or disbursement of only 15% of pensions, among other fatalistic scenarios.
In this way, Herrero ruled out any substantial reduction of discharges, whose growth in recent years has been the largest in the history of modern Costa Rica. In the second slide, Herrero limited its commitment to control spending to say that in the next few years the "current expenditure" grow at the same rate of GDP, i.e. simply restrict their increase at the rate of growth of the economy.
Interestingly, Smith only mentions "current expenditure", setting aside the "capital expenditure" than from the budget for the 2011 - due to an accounting triquiñuela of finance aimed to circumvent the legal provisions on control of the deficit - includes also expenditure in education, health and housing. In such a way, one growing public spending would be outside saying Government commitment to control discharges.
Little credible
It is little credible Herrero argument that public spending cuts would cause a serious social upheaval. In recent months and years we have been exposed to a lot of news to show the high level of waste and abuse in the public sector: in 2009, we learned of the bridges Directorate of the Ministry of public works and transport, a body that in the last Government had spent more than $27 million in "bridges consulting" without having fixed one only.
Obsolete institutions such as the IDA (Instituto de Fomento and Municipal Consulting), IFAM (Institute for agricultural development), NOC (national production Council), etc., generate you losses to the Treasury every yea
The issue of tax reform in Costa Rica is undoubtedly complicated, although we must understand that our country depends on taxes for their livelihood and more importantly the proper collection of the same, which is where we really are the weakest no one wants to pay more without seeing positive results and improved quality of life. Speaking of taxes in our country is like asking for more laws when in fact the most expeditious solution would be the correct application of the same. In the case of tax reform must be understood that the Costa Rican people are tired of corrupt politicians, even if the government has insisted he wants to implement an expansionary fiscal policy the people do not see results, and that this be true although it should be an increase in taxes should also be able to see a large reduction in government spending. While we need a reform in the fiscal support of the country's economic growth and improve macroeconomic indicators, this will directly affect the pockets of Costa Ricans, who surely if we see these efforts reflected in improved infrastructure and economic development in Costa Rica, we would be more willing to support such measures ....
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