San José, Costa Rica, since 1956

2005 Budget Slashes Social Spending

NO new teachers will be hired, no newschools will be built, no new guards will behired to protect the country’s nationalparks, and investment in infrastructure willbe reduced to a bare minimum in 2005…These are just a few of the governmentprograms and expenditures that will be cutor eliminated under the 2005 budget, unlesslegislators approve the Permanent FiscalReform Package, a tax package they havebeen debating for the last year and half.Finance Minister Alberto Dent onTuesday presented a rough outline of whatnext year’s budget will look like. The proposedbudget takes drastic measures tolimit government spending.“Since we have no certainty that thefiscal plan will be approved during the nextsix months, it would be irresponsible toincrease spending,” Dent explained duringTuesday’s weekly Cabinet meeting. “Forthat reason, we are preparing the budgetunder the assumption that the fiscal reformwill not be approved.”The proposed budget, which will be submittedto the Legislative Assembly on Sept.1, will total ¢1.4 trillion ($3.19 billion) —slightly less than 10% more than the 2004budget. However, taking into account inflation,which is expected to reach 11% thisyear (see separate story), the budget willincrease by practically zero, Dent explained.“The country’s economic stability willnot be negotiated,” Dent said. “This is not theeasiest solution, but it is the responsible one.”THE cost-cutting measures will cancelthe Public Education Ministry’s plans to hire2,000 new full-time teachers and build 75schools, high schools and teleconferencing styleschools in remote areas next year.Under the proposed budget, no institutionwould be allowed to hire additionalemployees. Salary increases for publicemployees aimed at compensating forinflation would be dramatically reduced.Essentially, funding for all governmentprograms, including basic infrastructure,would be frozen at current levels,and in some cases cut.All “non-priority” expenses such astrips, representation, receptions and food atgovernment institutions will be cut by50%. These measures will not apply atofficial functions organized by CasaPresidencial, the Foreign Ministry and theForeign Trade Ministry (COMEX).Through the measures, the governmenthopes to finish 2005 with a primary surplus(not including interest payments on thedebt) equal to 1.7% of the country’s grossdomestic product (GDP). This wouldreduce the fiscal deficit to an amount equalto 2.5% of the GDP, lower than the 2.9%the government hopes to achieve this year.The submission of the Central AmericanFree-Trade Agreement (CAFTA) with theUnited States to the Legislative Assemblyand a $350 million loan from the Inter-American Development Bank (IDB) tomake the country more competitive inpreparation for CAFTAare also conditionedon the tax plan’s approval (TT, July 23).HOWEVER, if the tax plan isapproved before the end of 2004, socialspending will be resumed, Dent said.The tax plan would provide the governmentwith additional revenues equal to2.56% of the GDP.Under this scenario, an amount equal1% of the GDP or approximately ¢95.8billion ($218 million) would be set asidefor social programs. The fiscal deficitwould also be reduced, dropping to justover 1% of the GDP.The fiscal plan would significantlyreduce the rate at which Costa Rica’s debtincreases. In 2005, only 6% of the budgetwould need to be financed through bonds,compared to 24% in 2004.DENT denied the austerity measuresare a sign the government has given up onthe tax plan.“We haven’t thrown in the towel,” hesaid. “We’re just being realistic. We haveour feet on the ground and will continue toprotect the country’s stability.”Dent admitted the tax plan faces anuphill battle. On the floor of the assembly,the tax plan faces 1,250 reform motions,1,000 of which were issued by members ofthe Libertarian Movement Party.Even if they finish debating themotions, legislators cannot vote on theplan until the Constitutional Chamber ofthe Supreme Court (Sala IV) rules on anunconstitutionality action filed last monthagainst the plan. Last week, the GovernmentAttorney’s Office recommended theSala IV uphold the action.“We’ll fight until the last day for thetax plan,” Dent promised. “But if it’s notapproved, people can rest assured thatwe’ll protect the country’s stability.”

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