Look around in Latin America and you will be hard pushed to find another government that is cutting taxes at a time of slowing economic growth and rising pressure for social spending. And yet that is exactly what Uruguay’s President Luis Alberto Lacalle Pou is doing.
A bill Lacalle Pou presented to congress on 2 March would grant US$150m of deductions and exemptions on income and social security taxes, and on levies for micro, small, and medium-sized enterprises. Of course, Lacalle Pou leads one of the few centre-right governments remaining in the region and part of the intent of the tax breaks was to lay credence to his liberal economic views – not to mention that tax breaks are a fail-safe popular measure for any politician.
There is likely to be some economic growth impact from the measure, as consumers put to use their increased purchasing power, or companies invest to expand or modernise with their savings. It may also generate a bit of a feel-good effect aimed at showcasing that Uruguay, despite a considerable economic slowdown, isn’t doing too badly. Public finances are better than they were just a few years ago and the country’s export-driven agricultural industry performed well in 2022.
The measure will go into effect as soon as it is approved by congress, according to Senator Jorge Gandini of the governing Partido Nacional (PN, Blancos). “The conditions are there to proceed,” Lacalle Pou said when he presented the plan to congress, where his five-party coalition holds majorities in both houses.
Indeed, the proposed tax cuts amount to only 0.2% of GDP, which is not a big number on the back of spending cuts that reduced the budget deficit to 3.2% last year from 5.8% in 2020. Other indications of a comfortable fiscal situation came when Uruguay’s exports promotion agency, Uruguay XXI, announced that the country is investing close to US$7.2bn in infrastructure projects nationwide between 2022 and 2024.
Economic slowdown
The bigger concern is by how much the economy will slow in 2023 and erode revenues. Economy and Finance Minister Azucena Arbeleche expects growth of about 2% this year, down from around 5% last year. But a prolonged drought makes growth projections extremely uncertain for an economy heavily dependent on agriculture.
The drought has been plaguing farmers and cattle ranchers since 2020, costing some US$1.18bn, or 1.9% of GDP, according to government figures. Precipitation in parts of Argentina, Uruguay, and Chile during the last four months of 2022 was less than half of the historic average and the lowest in 35 years. That and high temperatures have diminished or entirely decimated crops with lingering effects for 2023. For example, the shortage of fodder and water has had a ripple effect and pushed down milk production by 12% in the month of February. The sector has been importing grains from Argentina and is considering doing the same from Brazil.
The government in January extended by 90 days an agricultural emergency it had declared in October. Livestock, dairy, horticulture, fruit growing, and agriculture have been affected in the entire country, according to the decree. The Lacalle Pou administration is also stepping up farm aid, including subsidised loans and electricity rates, extended debt servicing deadlines, and emergency supplies of drinking water in rural areas.
Approval at stake
With Lacalle Pou’s approval ratings hanging in the balance – 44% in favour and 42% against – the president’s management of the drought and its economic impact could be decisive for his party’s performance in next year’s general elections. Presidential candidates are expected to be chosen in coming months.