Deficit spending and the proposal to raise taxes have put Costa Rica on the world stage. A column in Sunday’s edition of The Wall Street Journal compares fiscal policy in Costa Rica to the situations in Greece and Argentina. The writer, Mary Anastasia O’Grady, quotes the U. N. Economic Commission for Latin America and the Caribbean, which calculates the fiscal debt at 5.2 percent of gross domestic product for 2010. The figure earns Costa Rica the distinction of having the highest debt to gross domestic product ratio in Latin America for that year, she said.
The changes taking place with government spending in Costa Rica are recent trends. The previous Partido Liberación Nacional administration under Óscar Arias Sánchez expended the bureaucracy, and President Laura Chinchilla Miranda has increased spending on public security and education while introducing new social programs. An educational trust set up earlier this year authorized the government to borrow up to $168 million. Many of the new programs such as elder and day care centers have long-term funding requirements that go beyond the initial investments.
Ms. O’Grady blames the Inter-American Development Bank for offering loan packages that can only be paid with increased tax revenue. The same organization is to blame for helping former president Arias put together a $2 million political slush fund to support the North American Free Trade Agreement. The same bank gave Costa Rica an $850 million line of credit in 2008 for infrastructure projects and has pledged $500 million in loans for Central American nations to fight narcotics traffickers.
Costa Rica picked up another $132 million loan from the development bank earlier this year to upgrade prison facilities. Chinese banks are also interested in a piece of the debt market in Costa Rica, having offered $300 million in loans for the Reventazón hydroelectric project provided that a Chinese firm gets some of the work. The project is run by the Instituto Costarricense de Electricidad, which is an autonomous institution. However, the central government has not hesitated to fire executives who do not submit to the political will of the president.
A good example is Miguel Pacheco Ramírez, who was suspended from his position in December 2010, as director of the nation’s social security retirement fund. The suspension is set to expire next year, but Pacheco was forced into early retirement this month. His crime was sitting down with representatives of the International Monetary Fund with the goal of finding investments other than Costa Rican public debt for the pension fund.
The pension fund has $2.3 billion in assets on its balance sheet that are labeled as stocks, bonds and certificates. According to audited financials for December 2010, at least $1 billion is paper payable by the Costa Rican central government, and the rest are bonds issued through the central bank or tax agency. A marginal amount of $5 million is invested with banks in the private sector.
The last audited financial report appeared on the Caja Costarricense de Seguro Social Web site in December, and now the institution only publishes internal reports. Even the government’s regulatory agency for pension funds cannot get detailed access to financial reports from the Caja. The director of the agency complained in August that the Caja would not receive the requests for information. The
president of the Caja fired back by saying that the agency, the Superintendencia de Pensiones, is working to privatize the pension system in Costa Rica.
The pension fund, known as the Régimen de Invalidez, Vejez y Muerte, is a cause for concern because an internal report issued in July said that the pension fund is burning through its reserves. Projections for this year show the pension fund will run a deficit of $91 million, and experts disagree on when the fund will become insolvent.
Recent attention has been more frequently directed at the other social security fund, known as the Seguro de Enfermedad y Maternidad, which pays for the national healthcare system.
The same internal report projected that this fund will end the current year with a deficit of $193 million.
Financials for Seguro de Enfermedad y Maternidad show there is no multi-billion reserve fund as with the Régimen de Invalidez, Vejez y Muerte, and, instead, the majority of its assets are in the accounts receivable column, meaning it can only pay its obligations when payroll taxes are collected on time. The nation’s health care system fell substantially behind on payments to suppliers this year, and the biggest delinquent contributor was determined to be the central government. This is the same government that expanded its payroll by 20 percent under the Arias administration.
President Chinchilla made a big show of agreeing to pay the outstanding Caja debt of $241 million for public workers, but it was later revealed that the payment will consist of bonds issued by the central government. This latest round of debt pays an interest rate between 4 and 9 percent. Eventually it will have to be paid with future tax revenue.
Expats are encouraged to follow the problems in the Costa Rican social security system since legal residents are required to pay into the system under the terms of the immigration law. Not everyone is aware they are paying into both funds, although taking a look at the most recent receipt for the fund line items can quickly clear up any doubts.
Salaried workers contribute 9 percent of their income to payroll taxes in Costa Rica. Employers pay significantly more. The system is similar to Social Security in the United States, although is more than double the rate of 15.3 percent. There are no deductions or exemptions for payroll taxes, so a person earning a monthly salary of $500 and the employer are actually paying $167.50 in taxes. One of the solutions proposed to shore up the social security funds is an increase to those same payroll taxes.
Clearly taxing payroll carries a heavy burden on the backs of the working class and employers, especially at a time when employment ia growing slowly.
Wall Street Journal writer O’Grady condemns the government’s attempt to pass a value-added tax as coming down heavily on those who can afford it the least.
U. S. Secretary of State Hillary Clinton also warned at a summit on security earlier this year in Guatemala that, “true security cannot be built on the backs of the poor.”
It’s possible at least in Costa Rica that today’s increases in government will be paid by the children of the poor when the loans come due at the Inter-American Development Bank.