San José, Costa Rica, since 1956

President’s fiscal agenda gets needed boost

From the print edition

The stalemate between Costa Rica’s Legislative Assembly and the administration of President Laura Chinchilla seems to have been put aside last week, as lawmakers passed three economic laws deemed crucial by Chinchilla’s National Liberation Party.

During a low point earlier last month, opposition lawmakers blocked the bills in an effort to try to force the firing of Vice President Luis Liberman and Education Minister Leonardo Garnier over questionable letters of recommendation for a company that participated in a controversial public tender.

Legislators left the bills hanging and broke for their summer recess on July 5, vowing to continue their boycott when they returned.

When Congress reconvened on July 23, opposition lawmakers had not changed their position. But three days later, the Comptroller General’s Office launched a formal investigation of the vexed public tender at the heart of “recommendation-gate,” involving the National Oil Refinery. Whether this provided sufficient cover for lawmakers to cave is a matter of speculation. But in quick succession, the Chinchilla government’s three proposed laws were passed in a first round of debate on July 30-31.

Although first debate is usually the biggest hurdle to get a law enacted, the Costa Rican legislative process requires that bills go back for a second debate and final passage, before going to the president for signature into law. 

Normally, the time between first and second debate can range from one day to two months.

The executive branch official most directly involved in shepherding the three bills through the assembly was Finance Minister Edgar Ayales. 

After a high-level finance career at the International Monetary Fund and the World Bank, Ayales was tapped as finance minister in an emergency situation, taking over after his predecessor, Fernando Herrero, resigned in disgrace when the local press revealed that he and his wife engaged in apparent tax fraud. 

Herrero was in the middle of pushing a tax package through the assembly at the time, and the political fallout killed the reform bill and made a “Plan B” necessary (TT, July 13, June 29, April 19, 13, 2).

The Chinchilla administration’s tax agenda centered on a reform package that blew up with the Herrero scandal. The three laws passed last week are designed as supplements, but they now have become the government’s economic Plan B. 

The first two bills, the Fiscal Transparency Bill and the Law for Strengthening Tax Administration, are “housekeeping” bills, aimed at providing better government access to taxpayers’ financial information, closing tax loopholes, putting in place stronger sanctions to force better cooperation with tax authorities, and getting Costa Rica off the Organization for Economic Cooperation and Development “gray list” of countries not up to standards in international sharing of tax information. 

The last of the three new bills is the Eurobonds Bill, which if signed by Chinchilla would allow the government to issue up to $4 billion in dollar-denominated 10-year bonds to finance the government in the Eurodollar market. 

Currently, the Constitutional Chamber of the Supreme Court is reviewing the Eurobonds Bill, and it will likely return to a legislative commission. But Ayala hopes it will be approved by Congress and signed by the president by November.

At a July 31 press conference following the passage of the Eurobonds Bill, Ayales noted that, “This administration realizes that significant tax increases will have to wait until the next government. We have a 5 percent [of gross domestic product] fiscal gap. With these laws we passed today, we can make a little headway on that. 

“Some people say tax evasion and tax avoidance are in that 5 percent of GDP area, and that is true in most countries. But even with the strictest laws, you can only capture about 25 percent of missed tax collection, so we are talking about maybe a 1-1.5 percent of GDP increase in revenues with these laws, and it won’t be right away,” he said. 

Asked about the government’s principal focus on increased tax collection to close the fiscal gap, with very little done on containing spending, Ayales said, “We are doing our best to contain costs, but the main spending driver is the public-sector payroll, and that’s really tough to reform because there are so many government institutions, each with their own wage scales. The first order of business is to set up uniform pay grades across the public sector.”

Ayales warned that the administration “can’t touch acquired rights of workers.” Any changes, he said, would have to be on a “from this day forward” basis. 

“We’re not talking about immediate changes. The best we can do is to freeze hiring as much as we can, and rationalize public-sector payrolls going forward, easing out present government workers by attrition,” he said. “Again, results won’t be immediate. We are talking about starting to change a public employment culture so that in five or 10 years, significant improvement can be made.”

Ayales also acknowledged that like in most countries, new taxes are unpopular: “We all realize that taxes aren’t popular. But in Costa Rica, I think that’s particularly so because everybody is convinced that too much of tax revenue is wasted,” he said. “If we can show the public that their tax payments are well spent, then maybe that culture will start to change.”

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