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Costa Rica’s fiscal reform approved for ‘fast track’

September 28, 2011

A new fiscal reform package arrived in the Legislative Assembly around 10:30 a.m. Tuesday morning and by 4 p.m. it had been approved for a “fast track” vote in December. The reform package is the second attempt to restructure the national tax system this year after a plan presented in January was rejected.

The goal of the fiscal reform package is to cap and reduce the ballooning government deficit. Government debt is currently estimated at 5.1 percent of the gross domestic product and considered to be a top fiscal priority for President Laura Chinchilla’s administration.

With a vote of 43 for and 10 against during a full session on the Legislative Assembly’s main floor, or plenario, the reform was approved to be pushed along a “fast track.” It is anticipated that the package will be up for approval in two and a half months.

Chinchilla, as well as Second Vice President Luis Liberman and Finance Minister Fernando Herrero, have hinted at a potential financial catastrophe if a fiscal reform is not passed prior to 2014. With Central Bank President Rodrigo Bolaños projecting lower economic output towards the end of the year and into 2012, approval of a fiscal reform is considered urgent by government heads.

“The objective of this government is to resolve the fiscal deficit,” José Luis Arce, an economist for Economic and Financial Advisors S.A. (CEFSA), told The Tico Times last month. “If a plan can’t be agreed on in the Legislative Assembly during the next few years, Costa Rica could see large spending cuts to reduce the pressure on the budget.”

The decision to approve an expedited voting process for the new fiscal package is seen by many as an important step for a Legislative Assembly that has been at odds with one another for much of the year.

“Today’s vote of 43 legislators from six different parties expresses a possibility that this country can agree on items of great importance such as a fiscal reform,” said Presidency Minister Carlos Benavides. “It is evident that there is a willingness of this government to negotiate and reconcile to achieve objectives that we have established. We will continue to work together to construct a better country.”

Some of the proposed elements of the fiscal reform plan include a 2 percent tax on private education and medical services, a tax on luxury vehicles, and a tax of up to 20 percent on salaries greater than $8,000 per month.

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