As the economic realities sink in to the central government and lawmakers wrestle with revisions to a proposed value-added tax plan, the nation faces the possibility of unrest that has not been seen since the consideration of the free trade treaty with the United States and other Latin countries.
The last budget had a 4.4 percent deficit, and the total deficit exceeds $1 billion. Even if President Laura Chinchilla gets everything she has sought, her tax plan will raise just $500 million, if the predictions pan out.
Many facets of Costa Rican society have been beneficiaries of government spending. As the belt tightens, the screams can be heard.
Corte Suprema magistrates are irked that they will not get new vehicles. Lawmakers are irked because the president of the Asamblea Legislativa wants them to buy their own newspapers or read the information on a computer.
Union worker leaders are irked because the government has broken off negotiations for pay raises and seeks to decree a 5,000-colons raise for everyone.
That’s about $10, although the pay structure of public employees might mean more in some cases.
The Caja Costarricense de Seguro Social already experienced a strike by physicians. The Asociación Nacional de Empleados Públicos y Privados is urging its members to take to the streets next Wednesday to protest the unilateral pay raise. An organization Web page called the raise equivalent to a wage freeze. The organization also fears layoffs in public agencies.
There is some justification to these fears, because the central government has hinted at deep cuts in the workforce if the new tax package is not approved. Lawmakers are beginning to consider the measure now, but there are many suggested amendments that must be considered, and the whole process has been submitted to the Sala VI constitutional court because some lawmakers think it is unfair. The court has ordered the legislature to stop short of final approval of the measure until the case can be decided. That may take a year.
The Asociación Nacional de Empleados Públicos y Privados said the budget gap can be closed by better collection from tax cheats and the elimination of some 200 exemptions to the tax law.
The doctors’ strike and the protests next week are just promises of things to come. The government is going to be forced to take away benefits it has given the country’s citizens. The only question is what benefits.
The central government has always overestimated the income from various taxes. As a tax is put into law, citizens take steps to avoid it. That is in addition to those who simply ignore it. Tax evasion is a national sport, and even with new computer systems, the Direccion General de Tributación, the tax collector, is overwhelmed.
The protests that come will not be about tax rejection. Costa Ricans will not form a U.S.-style tea party. Instead the push will be to put more taxes on corporations and high earners to provide continued support for government benefits. At some point there is a breaking point where firms and successful individuals find greener pastures.
Some European countries with their high taxes are seeing a talent drain now for just that reason. As the spiral tightens, there is a real chance that the government will become unstable and that demogoguery will rule.