- Category: The Nation
- Published on Monday, December 06 2010 06:10
- Written by Rod Hughes
- Hits: 669
Finance Minister Fernando Herrera has been quoted widely as urging tax reform to raise revenues to allow the country to avoid having the national debt climb to burdensome proportions in the coming years.
Time was, before the world economic meltdown, when former President Oscar Arias enjoyed a budget surplus and all was right with the world, but that surplus went when Arias was forced to shell out to the nationalized banks to stimulate lending in 2009.
No one questions that decision because it cushioned the national economy from the worst blows, as did borrowing from international banks. But that left its effect: In 2009, the public debt was 3.9% of the gross domestic product.
It still hovers at 3.5%, or $1.27 billion, pocket change compared with the U.S. debt but still worrisome to a small economy. No one denies that the tax structure of the country needs an overhaul, but tax reform is a dirty word in this country.
The fact that in the six years ending in the middle of the Arias term, Costa Rica had been able to pay off 40% of its old debt had been due to two factors: the austerity government of President Abel Pacheco (2002-06) and more vigorous tax collection, a trend started by ex-President Miguel Angel Rodriguez, a former business executive.
Before that, tax evasion had been nearly a cottage industry, aided by chaotic, vaguely-written laws. President Pacheco made it his crusade to reform the system, but his unicameral congress was fragmented among small parties. They labored four squabbling years, coming up with a law no one liked that was euthanized by the Supreme Court, which declared it unconstitutional.
Herrera summed up the present situation like this, "The public finance situation is a reflection of the economic dynamic of the country, with tax income growing at relatively low rates...and a public expenditure that grows at very high rates because of increases in salaries, pensions and social spending."
Proposals include raising income taxes, a new value added tax, and a special tax on casinos. Of course none of these measures are politically palatable but if is not done, Herrera warns of "a significant deterioration in the macroeconomic stability of our country in the coming years."
But Costa Ricans admit to a tendency toward procrastination and this is taken to a high art among lawmakers. Costa Rica posted solid growth of 4.5% this year and 5% is predicted next year which might lull them into complacency.
This euphoric "never put off until tomorrow what you can put off until the day after tomorrow" attitude could pose a severe problem in the future for a nation that happily watched their already good credit rating rise even higher this year.