Caribbean & Central America - January 2012 (ISSN 1741-4458)

The long wait is over. The government of President Mauricio Funes finally managed to get a tax reform through the legislative assembly at the tail end of 2011. This will increase income tax on high-earning individuals and companies. The timing was crucial. El Salvador will hold legislative elections on 11 March when the main right-wing opposition Alianza Republicana Nacionalista (Arena) could emerge as the dominant party in congress. Arena, which is aligned with the private sector lobby Asociación Nacional de la Empresa Privada (Anep), was the only party to oppose the tax reform bill.

The tax reform took effect on 1 January. The economy ministry calculates that it will bring in an extra US$170m in 2012, which will be channelled into social projects. This is slightly less than the US$177m the Funes administration had sought. Those who earn up to US$503 a month will not pay income tax (the threshold was lifted from US$338), meaning 263,000 people will be exempt from income tax. Income tax was not increased for the middle class - those earning between US$2,080 and US$6,200. The ruling left-wing Frente Farabundo Martí para la Liberación Nacional (FMLN) rejected the proposed increase by the Funes administration on the grounds that the burden of tax fell disproportionately on the middle class. The 3,657 Salvadoreans earning in excess of US$6,200 per month will start paying 30% income tax (up from 25%). Companies that report annual earnings of less than US$150,000 will continue to pay 25% but those reporting above this will be taxed 30%.

A 2009 report by the Inter-American Development Bank (IDB) and the Central American Institute of Fiscal Studies argued that 30% of the income of the poorest 10% of households in El Salvador went on tax, the next lowest 10% of the population paid 17%, while the wealthiest 10% contributed just 11% of their income.

The business sector, represented by Anep and backed by Arena, opposed paying any more taxes, insisting that Funes “squandered” resources in spending and social programmes. The government’s riposte was that a higher tax take is essential to stop El Salvador from falling further and further into debt and that investing in social programmes to benefit the poor was essential for the country’s economic as well as social development.

The government invested US$597.7m in social programmes and infrastructure construction in 2011, according to the presidential technical secretary, Alex Segovia, up from US$481m in 2010. He said this would rise to US$839m, the equivalent of 3.5% of GDP, in 2012, partly funded by the increased tax take. “The social security system is now a reality in El Salvador,” Segovia said. He added that the aim for the remainder of Funes’ term, which concludes in June 2013, was to consolidate this as a legacy.

The reform was approved by 66 of the 84 deputies, with the 18-strong Arena bloc rejecting it en masse. It was important for Funes to push it through congress before legislative and municipal elections on 11 March because Arena could strip the FMLN of its congressional edge. As things stand, the FMLN controls 35 of the 84 seats in congress, followed by Arena with 18; Gran Alianza por la Unidad Nacional (Gana), a mid-term splinter group from Arena, 16; the Partido de Conciliación Nacional (PCN), 10; and smaller parties, five.

An opinion poll carried out by LPG Datos for the conservative daily La Prensa Gráfica projected a 29.5% to 22.2% advantage for Arena over the FMLN. If this is accurate Arena would increase its congressional presence significantly, the FMLN would lose ground and Gana, which was third in the poll with 3.5%, would suffer the fate of every previous splinter group in El Salvador: life in the political wilderness. Another poll, by the Instituto Universitario de Opinión Pública de la UCA (Iudop) concurs that Arena will increase its presence but concludes that the FMLN will remain the largest party (29.6%), followed by Arena (24.2%) and Gana (7.6%), a respectable first electoral outing but insufficient to maintain its current presence.

The PCN and the Partido Demócrata Cristiano (PDC) are in the midst of a prolonged legal battle after the constitutional branch of the supreme court ruled last February that they should be wound up; this was upheld by the supreme electoral tribunal (TSE) in October, but another branch of the constitutional court is now hearing their appeal against the TSE. While this convoluted process was going on the two parties took the opportunity to set up surrogate parties: the PCN will compete in the elections as Concertación Nacional (CN), while the PDC set up as Partido de la Esperanza. The public does not seem impressed.

It is unlikely that the FMLN will lose significant ground in the 84-seat congress but a revived Arena could leave Funes with a potentially rough ride for his final year in power before presidential elections in March 2013. When Funes has had strained relations with the FMLN, he has generally been able to win backing from Gana, but this option might not be available to him after the elections.

• Munguía Payés

David Munguía Payés is El Salvador’s new public security and justice minister. Not even under the succession of right-wing governments that ruled El Salvador between the signing of the peace accords in 1992 and 2009 did a military man hold the top law and order post. The appointment of Munguía, a retired general by the country’s first left-wing government caused a furore. Veteran guerrillas in the FMLN, which brought President Funes to power, argue that his appointment was part of a pact with the US, and will lead to the militarisation of the police. Munguía, a close ally of Funes, had served as defence minister, a position which has now been filled by General Atilio Benítez, who led Salvadorean troops in Iraq.

• Murders

There were more murders in 2011 than in any other year since the signing of the 1992 peace accords. According to police statistics, there were 4,308 murders with five days of December left, more than the previous record of 4,233 in 2009. The number of homicides in 2011 represented a 9.3% increase over 2010. The new public security and justice minister, David Munguía Payés, claims that 90% of the murders are gang-related, but, in a major disparity, the national police (PNC) put this at just 30%.