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Despite a growing deficit for Costa Rica, no new taxes planned for 2015

September 2, 2014

Costa Rica’s deficit is estimated to grow to 6.7 percent of the gross domestic product in the next year, according to the 2015 budget presented to the Legislative Assembly on Monday afternoon. Vice President and Finance Minister Helio Fallas presented the 2015 budget at ₡7.9 trillion ($14.5 billion) with no plan for new taxes.

Fallas also said that the country would issue another $1 billion in Eurobonds as one way to help keep doors open.

Much of the increase in proposed government spending comes from the need to service pre-existing debts and constitutionally mandated spending, Fallas said. But that doesn’t mean there is no growth in the 2015 budget. A statement from the Finance Ministry said aside from servicing the debt and interest payments, the budget was still proposed to grow by ₡518 billion, more than $955 million. The vast majority of that increased spending — 51 percent — goes to education. Education spending alone is constitutionally mandated to receive 7.4 percent of GDP annually. The next largest section of the increase goes to pensions.

Fallas said that some ₡1.7 trillion — more than $3 billion — would be allocated to amortize the country’s existing debts, plus another ₡2 billion for financing costs.

“Compared to past years, 2015 will see a significant increase in debt payments due to the fact that the government will have to make important payments next year,” Fallas said during the press conference. Costa Rica has long-term debt that will mature in 2015.

As one part of its strategy to keep the government operating, the finance minister will issue another $1 billion in sovereign debt in the fourth installment approved by the Legislative Assembly. The government issued another $1 billion of Eurobonds in April soon before Solís took office. The country’s inability to pass fiscal reform resulted in higher interest rates on 30-year bonds, which rose to 7 percent up from the 5.63 percent interest Costa Rica had to pay on $500 million in 30-year bonds issued in April 2013. As the deficit grows and tax collection remains meek, interest rates may well exceed 7 percent on these upcoming Eurobonds.

One revenue stream the administration seems bully on is improving tax collection. During his 100-day speech, President Luis Guillermo Solís noted that tax evasion, estimated at 13.8 percent of GDP, outpaced actual tax collection during 2013, at 13.1 percent of GDP. Fallas said that there is no plan to propose new taxes but asked lawmakers to consider the government’s bill to fight tax evasion.

According to the proposal, young people and infrastructure will be among the sectors seeing a bump in their budgets. Spending on children is set to increase by 83 percent from ₡17.5 billion to ₡32.1 billion, roughly $59 million. The resources are destined for care, shelter, rehabilitation programs or treatment of disabled or at-risk children, as well as education and training for teenage mothers.

Taking a step towards making good on a campaign promise, Solís’ administration is proposing a 13 percent increase in infrastructure spending, more than twice that of the 5 percent increase in the 2014 budget. Besides highways, the proposal sets funds aside for the construction of a new building for the Public Works and Transport Ministry.

According to Costa Rican law, the executive branch must present its budget to the Assembly for the coming year every Sept. 1. The legislature has until November 30 to approve the budget.

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