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

In her description of current negotiations aimed at securing the approval of her proposed fiscal reform, President Laura Chinchilla likened the Costa Rican economy to a Rubik’s Cube. The analogy - where aligning one colour leaves the rest in disarray – corresponds to the short-termist solutions the government has been forced to adopt while the fiscal reform is under discussion. Yet, at one fell swoop, Chinchilla appeared to turn the tables to her advantage in September, obtaining support for her (third) proposed fiscal reform from the opposition Partido Acción Ciudadana (PAC) and in so doing, triggering the split of the legislative opposition coalition that seized control of the legislative assembly (AL) from her ruling Partido Liberación Nacional (PLN) in May [RC-11-05]. The opposition hopes of striking a broad electoral agreement ahead of the 2014 general election is now all but certain to remain just that.

The alliance comprises the PAC, Partido Unidad Social Cristiana (PSUC), Frente Amplio (FA), Movimiento Libertario (ML) and Partido Accesibilidad sin Exclusión (Pase). The main problem for some members of the alliance was that the PAC announced it would back the expedited discussion of the new proposal after negotiating amendments with the PLN, but prior to discussing the document with them. For the FA and PSUC, the move showed that the PAC would go it alone whenever possible, which they considered a bad omen for any future electoral arrangement.

For Chinchilla, however, the timing could not have been better. The deal was closed on 13 September, which meant she could announce it during her 15 September speech in commemoration of the country’s independence from Spain. Last year, the president’s address was riddled with warnings about the escalating levels of narco-trafficking and violence; this time around, she had some good news to deliver and her speech was remarkable for the absence of harsh words for the legislative opposition which had already blocked her fiscal reform twice. “Today, I recognize the profound maturity of the representatives…the baton has been passed from one administration to the next way too often. We can’t go on with partial solutions, with irrational cuts and with under-spending to our heart’s content, undressing some saints to dress up others. We can no longer patch up our development”, said Chinchilla.

• The proposal

Although the full details of the plan have yet to be disclosed, the local press revealed that the PLN and PAC agreed on 17 of the 18 points it contains and the government hopes to raise an additional US$900m (or 2% of GDP) in tax revenue per year. One of these agreements was reached with regards to the VAT levied on of private education and healthcare services. While the original plan proposed a taxation of 14% (and the second of 10%), the third proposal reduced it to 2%. The agreement also stipulates the creation of two taxes that did not feature in the previous proposals: a ‘world income tax’ (‘renta mundial’) of 15% for all profits generated outside Costa Rica and which were repatriated – this does not include profits generated from inheritance, a bequest or donations; and a ‘global tax’ (‘renta global’, the proposed percentage is unknown) which is to be applied to profits generated both from income and capital gains.

• Tax revenue surges

In August sales tax receipts were 15% higher in real terms than for August 2010. This helped the fiscal deficit which was held at 2.9% of GDP for the first eight months of the year. The double-digit jump in sales tax revenues in August was the biggest month-on-month rise since June 2008.  Sales tax receipts for the month came to C$48bn (US$94.3m). In the first eight months of 2011, the government ran a fiscal deficit of C$584bn (US$1.13bn). This is equivalent to 2.9% of GDP and was better than expected. The government is expecting a deficit of 4.8% for 2011.

• Timing tobacco-related deaths

To highlight the fact that a Costa Rican dies of tobacco-related causes every 160 minutes, in mid September the national anti-tobacco network (Renata) installed a giant alarm clock that rings at 160-minute intervals in front of the national assembly in central San José. The clock will remain there for one month and is intended to convince legislators that proposed anti-tobacco legislation stuck in congress since 2008 should be approved. The most recent objections to the bills, which were last debated in August, came from Luis Antonio Aiza, a PLN deputy who, ironically, is also a doctor and a member of the Caja Costarricense de Seguridad Social (CCSS).