Costa Rica: Government proposes tightening the belt in 2020
September 9, 2019
On 30 August, the fiscally-strained government of Costa Rica presented to Congress its 2020 budget proposal, which outlines cutting spending by 4.3% compared to this year. While this could clip domestic demand somewhat, the effect on the economy should be limited by the fact that the majority of the savings are expected to come from a significant cut in debt repayment costs. The closely watched fiscal deficit should narrow on the back of the government’s cutbacks, although the public debt ratio will continue rising notably.
Current expenditure, which includes spending in areas such as public salaries and services, and accounts for the majority of total spending, is proposed to increase 3.9% in 2020, which would represent the slowest increase in the past decade. This proposed increase is also below the maximum allowed increase in 2020 of 4.7%, according to the new fiscal rule that recently came into effect which limits current expenditure increases based on how fast the economy is growing.
Spending in 2020 is planned to be financed 52.0% through tax and 48.0% through debt. This represents a notable improvement compared to this year—currently, 46.7% of spending is funded by tax and 53.3% is funded by debt—and is partly due to the VAT on goods and services that came into effect in July, which replaces an old sales tax on goods.
On reflection, Fernando Fallas Jiménez, economic analyst at Ecoanálisis, said: “The 2020 budget represents a cut of 4.3%, which is a positive sign for investors and the general population, as the government is taking steps to contain public spending.” Reducing the fiscal burden is key, as according to Jiménez, “debt repayment costs limit the funds available for education, infrastructure, or fiscal stimulus”.
Author: Edward Gardner, Economist