Caribbean & Central America - February 2011 (ISSN 1741-4458)

If it had waited another two days, the Costa Rican administration of President Laura Chinchilla could have submitted its fiscal reform bill to the national assembly (AN) on the eighth anniversary of the fiscal reform proposed by the administration of Abel Pacheco (2002-2006). But then again, that was an anniversary few wanted to remember; the 19 January 2003 fiscal reform proposal which aimed to raise tax take by 2.5% of GDP, just like Chinchilla's bill, presented to the AN on 17 January, fell flat on its face. In the past 25 years, none of the 15 fiscal reforms approved (1985-2009) have accomplished the aforementioned goal. Many local analysts already dismiss Chinchilla's proposal as a failure in the making. 

Costa Rica's fiscal deficit in 2010 was 5.3% of GDP (US$1.97bn) according to preliminary figures from the finance ministry - a 73% increase on 2009; in 2006 it stood at 1.5% of GDP. The primary deficit (after deducting interest payments) was US$1.18bn - up 178% on 2009. The finance ministry released a statement predicting that the fiscal deficit would reach 10% of GDP by 2016, some US$4bn, unless the reform was approved soon. But with the bill being debated only twice a week (Monday and Tuesday) for two hours, expediency doesn't seem to be a priority for the legislators.

The proposal includes increasing value added tax (VAT) from 13% to 14%, and extending it to education (see sidebar) and private healthcare to raise an estimated additional US$900m as well as cutting public spending in a gesture to the right-wing Movimiento Libertario (ML). The ML's insistence on belt tightening could be interpreted as the direct result of being in opposition to the previous administration of President Oscar Arias (2006-2010), the government with the highest average spending level of the past 25 years (12.45% of GDP per year). Thus, the fiscal reform discussion has centred on a polarised view of spending which considers it either an indispensible investment or an irresponsible outflow. To be fair and taking into account that most of Arias's spending increase was to finance more police on the streets and better salaries for teachers, many local commentators considered it a justified and necessary investment.

The opposition Partido Unidad Social Cristiana (PUSC) has also submitted an alternative proposal, arguing that the fiscal reform presented by the government is unnecessary. According to the PUSC, the Chinchilla administration should transfer surpluses from the decentralised state companies such as the Instituto Costarricense de Electricidad (ICE), the Instituto Nacional de Seguros (INS) and the Instituto Nacional de Aprendizaje (INA), which in 2010 reached ¢2bn (US$3.87m), before increasing the tax burden which according to them would have a disproportionate effect on the middle class.

Other critics of the reform want to see the government toughen sanctions against evasion rather than increase taxes. For example, of the 398 tax evasion cases investigated by the public ministry between 2000 and 2009, there were only two convictions. Furthermore, in 1991, income tax evasion equated to 2.5% of GDP, while in 2007 it reached 4%; for many, the answer lies with stronger enforcement measures, stricter penalties for evaders, a more efficient distribution of state resources and belt tightening rather than increased taxation. 

Inflation: In January, the consumer price index (IPC) increased 0.68% on December 2010. Year-on-year, inflation was 4.84%, lower than the previous year when it reached 5.34%. Food and drinks registered the highest increase, followed by rent and other housing costs. For 2011, the central bank forecasts inflation of between 4% and 6%.

• Education VAT

t has now emerged that the VAT on education will not be 14% as previously rumoured but 10%. However, the additional tax burden will only be applied to upper-middle and higher income households spending more than ¢110,000 (US$2,130) in tuition fees per month -or ¢440,000 per term (quarter). Those paying less than ¢110,000 per month will be exempt from the new levy.