San José, Costa Rica, since 1956

Costa Rica’s 2013 budget a controversial move

From the print edition

Costa Rica’s gross domestic product, at an estimated $55 billion for 2012, is only about 0.4 percent of the U.S.’ $14.5 trillion economy. Nevertheless, because of a big public sector and a 500-to-one exchange rate, when we examine this country’s national budget in colones, presented by President Laura Chinchilla’s administration this week to the Legislative Assembly, we can talk in trillions, just like the United States. 

It’s budget season in Costa Rica: The law requires that the national budget be approved by Nov. 30 every year. Finance Minister Edgar Ayales has been conscientious in delivering a draft 2013 budget for discussion on Monday, the opening day of the assembly’s ordinary session, when the agenda is set by assembly rules and not the executive branch. The draft budget will be evaluated and voted upon first in the assembly’s Finance Commission, then before full Congress.

An important point to make is that Costa Rica’s national budget is allotted for three branches of government, plus the fourth branch, the Supreme Electoral Tribunal, and autonomous institutes such as the Costa Rican Electricity Institute, the huge power and telecom utility. But the national budget does not include the Costa Rican Social Security System, or Caja, the country’s flagship social security, health care and pensions system.

For 2012, the national budget was ₡6 trillion, while the Caja’s budget was ₡2.3 trillion. 

The government claims that Costa Rica is an under-taxed country, with the national budget at about 22 percent of GDP. But if we add another 8 percent on top of that for the Caja, the total tax burden runs to 30 percent of GDP – well below European 40 percent levels, but higher than the U.S.’ historical 22-26 percent government spending to GDP ratio. 

While Costa Rica’s budget is very much in the public eye and the subject of much political discussion, the Caja budget, autonomously prepared by Caja financial staff, is quietly approved by the Comptroller’s Office, with little or no public attention.

The 2013 Costa Rica national budget presented by Ayales is ₡6.4 trillion, a 7.5 percent increase over 2012. The budget is controversial right off the bat. First of all, it’s illegal. Article 6 of the Law for Financial Administration and Public Budgets states that “to maintain sound public finances, funding of current expenditures from long-term sources is forbidden.” But the 2013 national budget does just that: 40.8 percent of ₡1.9 trillion in public sector salaries and employee compensation are to be paid for by issuing medium- to long-term government debt. Overall, only 57 percent of proposed expenditures are covered by current revenues in the government’s 2013 budget, with 43 percent financed by debt – much of it medium- to long-term. 

This situation is generated by Costa Rica’s main budget bind: constitutionally mandated expenses such as salaries, pensions and debt service account for the great majority (85 percent) of government spending, leaving little room for investment. Infrastructure – the Public Works and Transport Ministry – is budgeted to take a 2.4 percent budget hit, so that roads, already falling apart, will get even less attention next year. 

Asked what the solution to Costa Rica’s budget bind is, Ayales gave the stock government answer: reduce the deficit, projected at 5.26 percent of GDP for the 2013 budget, with the implication that this must be by way of additional taxes, since the great majority of expenses are untouchable. 

Trouble is, the Chinchilla government’s biggest political defeat has been the failure of it’s proposed tax package in April of this year, with Ayales’ predecessor, Fernando Herrero, losing his job because of a tax scandal of his own. Since then, this government has lowered its sights on reform of public finances, concentrating its efforts on two tax housekeeping bills, and an authorization to issue Eurodollar debt to refinance public debt at low international rates.

The three bills, passed last month, provide wiggle room for the government to muddle along without addressing the basic budget problem: an out-of-control public sector payroll. 

To its credit, the Chinchilla administration has proposed the start of a long-term process to achieve eventual payroll reform. Public sector unions have already come out against any attempt to tamper with their acquired benefits. But this fight will be for the long term. For the short term, the 2013 budget has the country persisting with its unsustainable deficits. The government, with 21 months to go in office, is basically playing it safe, riding along on good economic growth, exchange stability and low inflation, hoping economics won’t blow up in its face. 

Odds are that they’ll get through with this strategy. But in something as politically charged as administering budget austerity among government entities, each with patrons in the assembly, you never know.

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