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Caribbean & Central America - September 2015 (ISSN 1741-4458)

COSTA RICA: Government banks on tax hikes, not spending cuts

On 1 September, the Costa Rican government unveiled its proposed budget for the next fiscal year. The 2016 budget will see the smallest percentage increase in ten years: 0.5% more than the C$7.9tr (US$14.5bn) 2015 budget, the largest in the country’s history. The administration of President Luis Guillermo Solís proposes cutting spending by US$726m, with almost 99% of the cuts falling on the executive branch. But with the fiscal deficit expected to reach 6.9% of GDP during the next budget cycle – 0.5% higher than in 2015 – the government needs congress to support its earlier proposals for tax reform to start making any progress on Costa Rica’s debt, which is now close to 49% of GDP.

The budget

Ahead of the official ceremony to announce the budget, Solís assured the nation in his weekly television address that there would be no new cuts to public education, security or anti-poverty programmes. Instead, the executive will bear the burden of almost all the cuts, with a 36% drop in spending on publicity, a 30% decrease in spending on international travel and a 17% reduction in consulting expenses.

The finance minister, José Francisco Pacheco, said that the government’s hands were effectively tied when it came to tackling the fastest rising parts of the budget. Servicing the country’s debts accounts for 31% of the 2016 budget proposals, followed by 30% for education spending; pensions account for another 11% of the budget. Over the past few years, Costa Rica has been able to auction tranches of US$4bn in Eurobonds to close its budget gap but the last of that debt was issued in the first six months of 2015. To address the shortfall, Pacheco said the government “is going to have to look elsewhere”.

Tax reform

Both Pacheco and Solís used the occasion of the budget to reiterate their calls for congress to pass a series of tax reform proposals set out on 10 August, which they hope would raise government revenue by up to 2% of GDP. The tax bill proposes replacing the current 13% sales tax with a new value-added tax (VAT) of 14% in the first year, rising to 15% in the second year.

Income tax would become slightly more progressive, with the minimum taxable income threshold rising to salaries of over C$793,000 (US$1,468) a month; while two new tax bands will be created. Those earning between C$2.1m and C$4.2m a month will pay 20%; those earning over C$4.2m a month will pay 25%. Capital gains tax will also be increased from 8% to 15% and the government would also introduce a ‘green tax’ of C$10 on every 250ml non-recyclable plastic bottle. In total, the bills would increase government revenue by US$1.1bn.

Despite the absence of corporate tax hikes, the business community did not react positively to the government’s proposals. “This is not a good time to talk about taxes,” José Manuel Hernando, president of the Costa Rican Food Industry Chamber (CACIA), said. He noted that taxing goods and services that currently are exempt would be a blow to consumers. “The government’s proposal really alarms and concerns our sector, which was been severely affected by the country’s economic situation, a total stagnation that has lasted for several months,” he said. Business leaders also fear the proposed reform would have a negative effect on job creation.

The political challenge

Despite broad agreement across political parties of the need to reform Costa Rica’s tax take, which has been essentially flat at 14% of GDP since 2009, the government’s proposals also met broad resistance in congress. In order to secure passage of the tax reform, the ruling Partido Acción Ciudadana (PAC) will need to build alliances, as it only controls 13 of the 57 seats in the legislative assembly.

Shortly after the government put forward its plans, Juan Jiménez Succar, the leader of the Partido Liberación Nacional (PLN) – the opposition party with the highest number of seats in congress (18) – said that his party would not approve any new taxes until the government cut spending. The opposition expressed reservations about the government’s budget, in particular contesting the official claim that it represented a “low increase” on 2015, given that the previous budget marked a record high. “I regret that the government feels the need to act like a shopkeeper who doubles his prices and then announces a 50% off sale to great fanfare,” Otto Guevara, the leader of the opposition Movimento Libertario, said.

Despite similar opposition to the Solís administration’s budget last year, opposition lawmakers failed to unite in their disagreement with the government, meaning it was passed as proposed, despite the PAC’s relative weakness in congress. According to Costa Rican law, the legislature now has until 30 November to approve the budget; the president would be extremely lucky to get the same result twice.

  • ‘El Chapo’ in Costa Rica?

On 31 August Alfredo Guzmán, son of the escaped Mexican drug lord, Joaquim "El Chapo" Guzmán, tweeted a picture of himself flanked by two men with their faces obscured. "Pleased to be here," he wrote alongside the image. "You already know with whom." The tweet is geotagged to a location in Costa Rica, initially prompting a flurry of excitement that Guzmán had given away his location. However, many security analysts subsequently pointed out that Guzmán was likely to be using a proxy IP address to avoid disclosing his whereabouts.

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