President Laura Chinchilla’s National Liberation Party government has just had the worst two weeks of any administration since the great devaluation of the 1980s under President Rodrigo Carazo. Chinchilla is not a polarizing figure. She is widely perceived as personally honest, and has won respect for standing up to her predecessor, ex-President Oscar Arias, in his attempts to turn her government into nothing more than a placeholder for a future Arias administration under his brother Rodrigo.
La Presidenta, hand-picked as a successor by Oscar Arias, inherited a mixed legacy from her former mentor – the presidency, yes, but with a diminished number of lawmakers in the Legislative Assembly (not a majority), and a newly bloated public payroll, inflated by 30 percent from when Arias took over. The payroll increase, combined with an unchanged tax base, drove Costa Rica’s fiscal deficit to 5.3 percent in 2010, the highest in Latin America. Given this situation, increasing tax revenues became the Chinchilla administration’s top priority upon taking office in April 2010.
Balancing Costa Rica’s books looked like a daunting task from the beginning, but the process, as it has played out, has been worse than any political analyst would have predicted. In 2010, when the PLN had the assembly presidency, feuds between the Executive Branch and its own lawmakers (many of whom trumpeted their allegiance to the Arias brothers), prevented a viable tax bill. The presidency minister, who is the Executive Branch’s chief of staff, had to be replaced to placate Liberation legislators.
Then, in 2011, the politically unthinkable happened: five minority parties in the assembly formed a majority coalition and took the assembly presidency away from the PLN. Under the assembly’s archaic procedural rules, by which any lawmaker can filibuster a bill to death, tax reform became a free-for-all of hodgepodge occurrences hastily thrown together.
Ottón Solís, founder and three-time presidential candidate of the Citizen Action Party, cut a deal with Liberation to put together a bill, which was passed in September 2011, but with dissenting lawmakers lodging appeals on procedural grounds to the Constitutional Chamber of the Supreme Court (Sala IV). The Executive Branch point man for putting together the tax bill was Finance Minister Fernando Herrero, a veteran bureaucrat of many Liberation administrations. Another crucial public servant playing a prominent role in addressing Costa Rica’s fiscal problems was Francisco Villalobos, in charge of the Tax Administration, Costa Rica’s equivalent of the U.S. Internal Revenue Service.
In quick succession, in the last two weeks:
• On April 2, Herrero resigned in disgrace after the daily La Nación published news that Herrero and his wife had omitted declaration on tax returns for a company they own, to the tune of ₡50 million ($100,000) in consulting fees from the Costa Rican government.
• On April 3, Villalobos resigned in lesser disgrace, when La Nación revealed that he had failed to pay ₡1.8 million ($3,600) in income taxes from 2008. (Villalobos paid as soon as what he described as his “inadvertent mistake” was made public.)
• On April 10, the Sala IV unanimously declared the September 2011 tax bill unconstitutional on procedural grounds.
Chinchilla’s legislative agenda lies in shambles. It may not be “back to square one” on the tax bill (the Sala IV has not yet released its full opinion), but significant backtracking will be necessary. And since the procedural mistake the court cited to strike down the bill was generated by an attempt to limit filibustering, prospects for the assembly being able to produce anything in the last two years of Chinchilla’s government do not look good.
In evaluating a way forward from this mess, three overriding situations stand out. First, Costa Rica’s fiscal position, while tough, is not yet dire. The country can still limp along with 5 percent or more deficits for another couple of years. But if the situation is not controlled soon, the next government taking office in 2014 will face huge economic problems. In this sense, Chinchilla’s administration is being more responsible than many governments in not simply kicking the can down the road.
The dysfunction of this government and Congress is appalling. With half of Chinchilla’s administration’s time in office now gone, a complete reset and turnaround towards basic legislative competence and effectiveness is a crying need, but with no solution in sight. Something very basic is missing in the fiscal debate: balance between cost-cutting and increased revenues in closing the fiscal gap. After a previous 30 percent government payroll increase, this government has not signaled any attempt to roll back the public sector.
The message to taxpayers has been: “This is what our government and our bureaucracy cost. Pay up.” Instead of at least exploring serious cost-cutting, the government has adopted populist “soak the rich” rhetoric and focused on widespread tax evasion – now shown by La Nación to be practiced by the government’s own financial and tax principals.
This grossly one-sided approach to reducing the government deficit is widely seen as coddling the bureaucracy at the expense of the productive sector, and undercuts the government’s appeals for “fiscal solidarity,” which is the name of the bill that the Sala IV just struck down. In the political environment now generated, all lawmakers and political parties know that there will be little or no political price to pay for obstructing a new tax law.
Going forward, the government does have a very good card it has underplayed up to now. Vice President Luis Liberman has a PhD in economics and worked in the Finance Ministry as a young man, before embarking on an outstanding private sector banking career. Liberman is now acting finance minister. Extremely competent and, despite being a lifelong liberacionista, politically neutral, he offers hope for critically needed leadership. Chinchilla would do well to give Liberman a much more prominent role in her government.