Government makes a double effort for new taxes

The government came out Thursday with a two-pronged effort to get new taxes.

On the one hand, the Ministerio de Hacienda warned of the impact of a credit downgrade by Standard & Poor’s. Then the same ministry unveiled the draft of a proposed law that would restrict government spending, if passed.

The ministry said that Standard and Poor´s said the probability was high that there would be a  new reduction in the country’s credit rating in the next 18 months. The rating agency said that Costa Rica’s rating was now BB- with a negative perspective.

Another rating agency, Fitch, affirmed the country’s unsecured foreign- and local-currency bonds at BB+ in January. That rating on a different scale is classified by Fitch as non-investment grade speculative.

Ratings are important, particularly for a country like Costa Rica where half the annual budget is borrowed money. A poor credit rating means high interest rates demanded by lenders.

Helio Fallas, first vice president and minister of  Hacienda, predicted big repercussions from the credit rating cut. Standard and Poor’s said the change in the rating reflected the continuing deterioration of the country’s financial situation, citing continued expenses
and the absence of fiscal reform.

The Luis Guillermo Solís administration has been trying to win passage of a legislative package containing new taxes since the president took office. There is resistance in among lawmakers.

Also Thursday the ministry presented a draft of  a bill that was designed to control the increase in the central government expenditures.

The draft was presented for discussion.

The announcement also pointed out that the legislature has been performing in an unconstitutional manner. The ministry cited Article 179 of the Costa Rican Constitution which says budgetary expenses of the executive branch cannot be increased if there is no evidence cited of new income to support them.

This article has been widely disregarded. The draft contains a proposal that future expenditures be accompanied by an explanation of their long-term sustainability.

Many lawmakers have been critical of the executive branch seeking new taxes without any effort to make significant budget cuts.

Right now the package for new taxes is held up in committee.

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