San José, Costa Rica, since 1956

Finance Minister: Tax reform protesters ‘misinformed’

Ahead of Tuesday’s protests against the government’s fiscal reform plan, Finance Minister Fernando Herrero sat down with The Tico Times to discuss what could happen if lawmakers reject the reform bill currently before the Legislative Assembly.

Excerpts follow: 

TT: There is a growing movement against the fiscal reform plan, including marches this week and opposition from free-zone companies in recent months. What are your thoughts on the public protests to the plan? 

FH: With these things there are always differences in opinion. As for the public marches Tuesday, it seems to me that there has been a lot of misinformation. The things mentioned as the reasons for the protest are false. 

The primary question is: What are we going to do with additional income [earned from new taxes]? It will be spent on educators’ salaries and will be invested in universities. Those are the most important spending areas the additional revenue is going to have. So, when I see that there are educators protesting, I don’t really understand how they can protest. They have to be receiving false information, because the pay is going to go to them. …

Private schools will have a very small tax rate of 2 percent, which hardly will be a noticeable cost. There is nothing that is receiving more preferential treatment in the tax reform than education. So, when people say there’s going to be a march, I don’t understand why they’re complaining. It’s very strange. It seems to me that there are leaders that are tricking the people they represent. They aren’t telling the truth. 

How is the fiscal reform going to affect people on a daily basis?

The most visible result will be the value-added tax and the conversion from a 13 percent sales tax to a 14 percent value-added tax. That is going to mean an increase in taxes. So, the majority of purchases are going to go up 1 percent from where they are now due to taxes. It will be a very small increase. 

The other change is that taxes will be charged on services, not only on goods. The cost of basic products [292 common household items and food] will not see much change, nor will basic services such as electricity, water, transportation and housing rent. 

What would happen if the fiscal plan weren’t approved? 

The complication is that debt grows very fast. We would have to continue going further into debt to finance government expenses. The government doesn’t have a policy of very restricted spending, so debt would continue to increase. If the plan is not approved, we go further into debt. 

That would mean that we would have to pay much higher interest rates. Nobody is going to loan the government funds to maintain the debt. … It would be much harder to reactivate the economy. If the international economy continues down the path of slow growth and volatility, we will have much less flexibility to defend ourselves against it. 

A fiscal reform must be approved one way or another, even if this plan fails. … Tomorrow is too late. It has to be approved now. 

Would you say that Costa Rica has reached a financial emergency? 

We know that if we continue down the road we’re on now, we’re going to fail. That is clear. Currently, we are financing about ₡1 trillion [$2 billion] with debt. We are paying salaries with debt. It is like paying for dinner with a credit card. You can do it sometimes, but not permanently. 

When do you think the Legislative Assembly will vote? 

It’s difficult to say. We had planned for the vote before Dec. 23. That’s not going to be possible. It appears that the Legislative Assembly will continue to discuss the fiscal plan through the end of the year. It could go through December and into January, depending on the process and if there are delays. 

After the first vote, if approved, the plan would have to go to the Constitutional Chamber of the Supreme Court [Sala IV]. I imagine some legislators will want to verify the constitutionality of the bill. The Sala IV has 30 working days to revise it. That step will probably last until the end of February. 

At that point, the plan would go back to the Legislative Assembly for a second debate, which would take place in March. The best possible scenario from the Finance Ministry’s point of view is a March approval.

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