Costa Rican President Falls Short on Fiscal Reform Promise

Costa Rican President Luis Guillermo Solís announced on January 19 that his administration would desert its fiscal reform plan, a cornerstone of his presidential campaign. His left-leaning party Partido Acción Ciudadana (PAC), a congressional minority with only thirteen seats of the 57-member body, introduced the proposal to the National Assembly in August 2015, where it has been gridlocked by the opposing majority since. The original fiscal reform plan most importantly included the substitution of the present 13 percent sales tax with a broader value-added tax. This tax amounted to 14 percent in the first year and 15 percent in subsequent years. Last week, PAC congressmen presented a new plan that keeps this value-added tax, but at the present, flat rate of 13 percent. Simultaneously, the plan calls for an expansion of the products and services included in the tax.

The introduction of a new draft suggests that Costa Rica’s much-needed fiscal reform will not happen anytime soon, particularly since congressional and presidential elections are scheduled for February of 2018. Without the reform, Costa Rica’s fiscal deficit and national debt, which doubled over the past ten years from 20 percent of GDP in 2008 to 41 percent of GDP in 2016, will likely continue to increase. According to projections by the international credit ratings agency Fitch, the national debt could reach 60 percent of GDP over the next decade. The agency also downgraded Costa Rica’s ratings from BB+ to BB after the reforms were halted by President Solís.

The executive branch blamed the legislature’s stalemate on its fiscal reform proposal on the Fitch downgrade. Vice President and Minister of Finance Helio Fallas said on January 19 that his ministry ‘‘had carried out multiple efforts to avoid the downgrade. The evaluation by Fitch ratifies once again… that administrative measures are insufficient, and it is urgent to [create and implement] new laws that strengthen our country’s tax system.’’ Fallas also called on the National Assembly’s executive committees to advance the new fiscal reform proposal before the end of Solís’s term.

For now,  the future remains unclear, but the announcement serves as a key shortcoming of the current administration.