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Stick to peace planning, says PAC founder of ex-President Arias’ plan to reduce Costa Rica’s fiscal deficit

September 30, 2014

Costa Rica’s former two-term President Óscar Arias on Tuesday announced a proposal to reduce the country’s fiscal deficit that included a mix of both direct and indirect taxes.

Arias’ proposition urges the administration of President Luis Guillermo Solís to reduce spending by 2 percent of the gross domestic product in the next two years, while increasing tax revenue by 3 percent in the form of new taxes.

To achieve that, the former president and Nobel Peace Prize winner, who served from 1986-1990 and 2006-2010, recommends a coalition of union leaders and representatives from the business and political sectors.

Costa Rica’s Finance Ministry and Central Bank expect the country to finish the year with a fiscal deficit of 6 percent.

Arias called for a national accord between members of the Solís administration, business leaders and other members of the private sector, as well as political parties and unions to seek a viable solution to the fiscal deficit problem. He said Costa Rica should seek to promote dialogue similar to Spain’s “Pacto de La Moncloa,” a series of economic reforms achieved in the late 1970s. The goal, he said, is to find common ground between those who support new taxes and those calling for spending cuts.

Arias, from the National Liberation Party, said he opposes the Solís administration’s plan to shift from a national sales tax to a value-added tax and a new global income tax.

Recommended: Solís outlines plans for Costa Rica in first Washington appearance as president

Earlier this month, ratings agency Moody’s downgraded Costa Rica’s bond rating to junk status, citing the country’s growing fiscal deficit and the failure of a proposed 2015 budget to cut spending.

Next year’s budget proposal currently is under discussion in a Legislative Assembly commission, where it has faced strong criticism from opposition parties – and even a leading member of the president’s own party, Ottón Solís. Responding to complaints that proposed spending is too high, the administration yesterday offered to slash $408 million from the proposal.

Lawmakers have until November to pass the budget.

No love lost

Citizen Action Party founder and Assembly Budgetary Commission President Ottón Solís criticized Arias’ proposal, saying the former president “lacks the moral authority” to discuss deficit reduction.

“[Arias] can talk about peace plans, but not about fiscal plans,” Ottón Solís said Tuesday.

President Luis Guillermo Solís also probably won’t be paying too much attention to Arias’ statements.

“I’ve had conversations with the finance minister about why his [Arias’] opinion isn’t viable,” President Solís said on Tuesday. “The transition from a sales tax to a VAT [value-added tax] with a global income tax has been proven in other countries not only to be viable but also ideal in reducing the deficit, as international credit ratings agencies have been requesting for years.”

President Solís added that, “It seems to me that Dr. Arias had the chance to lower the deficit during his administration after having two years of surplus, but he didn’t.”

When he left office in 2010, Arias passed on to his successor, Laura Chinchilla (2010-2014), a deficit of nearly $1.2 billion, about 5 percent of GDP, according to former Finance Minister Fernando Herrero.

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