Finance Minister: Costa Rica needs drastic spending cuts

May 31, 2018

Costa Rica’s new Finance Minister, Rocío Aguilar, presented a package of drastic cuts to public spending at the Legislative Assembly on Wednesday and asked legislators to support a tax reform. Both efforts are designed to help the country address its fiscal deficit, which has reached 6.2 percent of GDP.

“This is the most important collection of spending reductions since the 1980s,” the minister said when she presented the package. She insisted that the measures will not mean public sector layoffs, nor will it affect social spending, such as poverty alleviation or housing projects.

 

The minister proposed administrative measures, decrees and laws that together would achieve zero growth in the 2019 budget and reduce salary incentives for public employees.

She also proposed a 30 percent reduction in travel expenses and transportation, 30 percent in publicity, 50 percent in official events and ceremonies, the renegotiation of rental agreements on government buildings, and a salary freeze for high-level employees as well as a government hiring freeze across the board.

These measures will reduce the deficit by points 1.6-1.7 percentage points in relation to GDP during the coming years.

Aguilar admitted that this will not resolve the deficit crisis, but said it would provide “a positive sign of Costa Rica’s commitment to credit rating [agencies] and multilateral organizations… These measures are not a solution, but rather the first phase of a national strategy that consists of a reform to public employment, institutional redesign, and a more progressive and modern tax system that fits the country’s productive reality.”

Costa Rica’s past four presidential administrations have attempted to approve a tax reform to address the growing fiscal deficit, but without success.

“Time has run out,” Aguilar said. “If we don’t act, the interest rates Costa Ricans pay on loans will rise, investment will shrink, job generation will drop and the cost of living will rise.”

 

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