The nation’s finance minister, Helio Fallas, went on television Sunday night to warn that if a decision is not made this year on taxes that a crisis will follow.
The minister has a press conference planned for today in which he is expected to present proposals for a value-added tax and an increase in the income tax rates.
In his television speech, Fallas, who is hardly a persuasive speaker, defended the actions of the government and said that the Luis Guillermo Solís administration had cut spending by 198 trillion colons, some $375 million. That is just 5 percent of what the government had to borrow this year to support the budget. Nearly half the national budget is borrowed money. The cuts represent about 3 percent of the total budget.
Fallas called the runaway public salaries a complex matter that will not show results in the short term. Shocking public salaries and pensions have been headline material in the Spanish-language press and also on television.
He said that the government was involved in dialogues to limit public salaries in various worker agreements.
Fallas called the national economy healthy, and the title of his talk was that the economy would not become ill, presumably with passage of the administration’s tax package.
He said that although there has been less growth, the rate for Costa Rica still is above the average for Latin nations.
Inflation is controlled, he said, and exports maintain an acceptable rhythm. He said the government was fighting to reduce unemployment.
With adequate corrective measures, it will be possible that the growth be distributed better to reduce poverty and the lack of employment, he said.
He pointed out that the administration has presented bills to reduce fraud and smuggling but that the legislature had not acted. The anti-fraud bill has been in the legislature for a year, he said.
“We are not crossing our arms,” said Fallas. “We are undertaking actions to cut expenses, improve the collection of taxes and to confront problems in the long term.”
“With the support of all we will maintain our economy vigorous and healthy,” he concluded.
The Costa Rican national budget for 2015 is $7.7 trillion colons or about $14.5 billion.
Lawmakers last year declined to approve additional budget cuts. The government itself estimated that without more taxes the national deficit would reach more than 6 percent of gross national product by 2016.
What the government has been proposing is a value-added tax of 15 percent to replace the current 13 percent sales tax. The government sees the advantage to be that because taxes are collected at every stage of the distribution process merchants at every step are more likely to report taxes collected because they receive a deduction from their own tax liability.
Theoretically, the end user pays the same amount of tax under both systems.
The government also is preparing to increase the tax rates for income. The lowest rate for a corporation is 30 percent now.
Despite the claim by Fallas that the economy is in good shape, a number of business leaders have been cutting back in anticipation of a tax proposal.
On the political front, some lawmakers have hinted that any tax proposal from the Solís administration is dead on arrival.
A.M. Costa Rica recently addressed the country’s financial dilemma HERE.