Costa Rica remains the one country in Central America to not enact a tax reform after the world economic crisis that began in 2008. The current government hopes to remedy that in the near future. However, mounting scandals within President Laura Chinchilla’s administration continue to distract from the dire debt situation.
On Wednesday night, Chinchilla tried to steady her reeling government by announcing measures to reduce rising debt.
The president’s speech began with an account of how desperate the situation has grown.
“My government has had to deal with problems whose solutions were neglected for many years,” Chinchilla said. “One is the serious deterioration of public finances. For a long time, the Costa Rican government spent more than it received and today does not have the resources to meet its obligations.”
She said Costa Rican debt finances more than 45 percent of the country’s expenses. If this trend continues, programs such as scholarships, child care and investments in public security could be threatened.
Chinchilla’s four proposed measures for heading off the debt are: creating an electronic invoice for sales tax to try to reduce tax evasion; eliminating tax exemptions on many luxury goods; selling of government-owned property; and creating a new fiscal reform bill that would freeze wages and pensions, reduce political party financing and allow public entities to charge for non-essential services.
“These actions, coupled with those we have already taken, represent about 0.8 percent of Gross Domestic Product and ensure that the deficit does not exceed 5 percent by the end of my administration,” Chinchilla said. “But half of this figure will depend on the laws that are passed by the Legislative Assembly.”
A previous reform bill that emphasized raising taxes was declared unconstitutional by the Constitutional Chamber of the Supreme Court last week, ending a contentious battle in the assembly.
The new bill appears to include more compromises with the political opposition.
Still, Chinchilla disagreed that spending cuts some lawmakers have called for could solve debt woes. A slashed budget would result in thousands of layoffs, among other difficulties, the president said.
On Friday, a majority of political parties stated support for the president’s proposal. Only the Libertarian Movement expressed doubt about the plan. The daily La Nación reported that if the bill is approved, funds distributed among political parties after 2014 elections would be reduced ₡23 billion ($45.7 million).
Her speech intended on refocusing a government hit by scandal in the past few weeks. Her new finance minister, Edgar Ayales, also released a statement Wednesday, the day after he was named the replacement for displaced ex-minister Fernando Herrero.
Herrero resigned on April 2 after the daily La Nación reported he had underpaid his property taxes, while at the same time pushing a bill that raised taxes for Costa Rican residents.
Ayales said in a press release, “Costa Rica’s fiscal situation in the near term is tolerable,” but he is concerned about whether agreements could be reached to fix the problem in the long term. He said part of his job as finance minister will be to “build bridges” between opposing party members.
Ayales’ experience includes serving as executive director of the Inter-American Development Bank, alternate executive director of the World Bank and the bank’s manager of macroeconomic projects in Brazil, Suriname and Angola.
In addition, Carlos Vargas, a Finance Ministry official, will take the helm of the Tax Administration, after former director Francisco Villalobos resigned April 3 when it was discovered that he had failed to pay ₡1.8 million ($3,600) in income taxes in 2008.
The bane of Herrero still hangs over the Chinchilla administration. Herrero and his wife are embroiled in scandals involving a public relations firm called Procesos.
Opponents have accused the government of nepotism after it was shown that Procesos, directed by Herrero’s wife, Flor Rodríguez, received almost $1 million in contracts from political allies during the previous Oscar Arias administration and the first year of Laura Chinchilla’s government.
In the most egregious circumstance, the Costa Rican National Oil Refinery (RECOPE) awarded a $34,000 public relations contract to Procesos. RECOPE – a state-run monopoly – had looked at only three other businesses for the taxpayer-funded concession. The competing companies all specialized in selling construction materials, not public relations. The government has been accused of “influence peddling” since Herrero was finance minister at the time of the bidding.
Procesos also received contracts from the Presidency Ministry, Laura Chinchilla’s election campaign, and the Central American Bank for Economic Integration. The sum of the contracts totaled $830,700. On Thursday morning, Costa Rican police raided RECOPE and Procesos and the Herrero’s home.
The Finance Ministry has filed complaints against 12 employees who leaked the tax information about Herrero. The move stirred anger on social media networks. Costa Ricans expressed outrage at the government for trying to cover up its own corruption by going after whistleblowers.
The president of the High School Teachers’ Association, Beatriz Ferreto, told La Nación the complaints filed by the Finance Ministry made her “gag.”