Take a Ride on Costa Rica’s Fiscal Train Wreck
Costa Rica appears to be heading even further into a sorry chapter of its financial history. The plot is set to thicken — and the situation worsen — with the 2015 budget, which will rise to over CR$7.9 trillion (US$14.5 billion). The approval that the government snatched in a second congressional hearing on November 29 will see a budgetary increase of 19 percent compared to that of 2014.
The latest episode began with the formation of the Financial Affairs Commission, from which President of the Congress Henry Mora excluded Natalia Díaz, even though she is a member of the fifth largest national party, the Libertarian Movement (ML). He replaced her with Deputy Albelino Esquivel, of the evangelical National Restoration Party, the sixth largest in Costa Rica.
Mora broke two principles here: proportionality and gender equality. Deputy Díaz has referred the decision to the Constitutional Court and is still waiting for its answer.
Why did Mora take this decision? It seems as though he wanted to side-step the demands of the ML, which opposes higher taxes and stresses the need to reduce government spending.
The second sorry episode in the tale took place in the commission itself. Its president, Ottón Solís Fallas, presented what he dubbed a “mega-motion”: budget cuts of CR$307 billion (US$575 million). However, the majority of the commission rejected it.
It’s worth restating that, coupled with Fallas’s proposal, ML deputy Otto Guevara Guth presented another that targeted an additional CR$335 billion (US$628 million) worth of cuts. This was with the aim of reaching an annual reduction of 25 percent to the budget until state finances can be balanced, to bring it into line with the law. The Costa Rican Constitution does not permit spending to be financed with debt. But this too was rejected.
He wanted to side-step the demands of the Libertarian Movement, which opposes higher taxes and stresses the need to reduce government spending.
The reality is that three proposals came out of the Financial Affairs Commission: one, from the majority of deputies, would increase the budget by 17.1 percent on the previous year, and two from the minority Broad Front and Deputy Marco Vinicio Redondo, which would meet that and raise taxes even further.
The so-called cuts that came out of the commission lack any serious appreciation of public-spending levels. Ottón Solís has confirmed that only his motions — and all those proposing even greater cuts — are in line with the recommendations made by international organizations to prevent Costa Rica from further downgrading its credit rating.
The third chapter came in the full congressional hearing on November 20. Given that no proposal contained any solutions for seriously addressing the fiscal deficit, the three initiatives ended up being rejected. The majority proposal was opposed by the statists for being too small of an expansion, and by the liberals for being clearly wasteful. The two other proposals only received the backing of the Broad Front and the minority government of the Citizens’ Action Party.
With the three proposals knocked out of the park, the president of Congress submitted the original budget developed by the executive in September: an even higher rise in spending of 19 percent.
The battle to constrain state spending was already lost at the commission stage.
And here we come to the fourth chapter. On November 24, the 19 percent increase was submitted to a vote, where 26 deputies voted against and 25 in favor.
Nevertheless, Mora arbitrarily claimed that the proposals had effectively been approved, claiming that Congress is constitutionally unable to reject government spending plans, but rather has to ratify them. In the face of this ruling, several deputies took the issue to the Constitutional Court.
Despite the results of the first debate still in dispute, Mora proceeded with the budget for a final hearing on November 29, where the Social Christian Unity Party split from the opposition and gave their support to the Broad Front and President Luis Guillermo Solís’s government. With four additional votes in the bag, the budget was approved.
In this way, even though the constitutional hearing has yet to be concluded, the vote in the second hearing suggests that the proposals will be effective for 2015. Despite arduous discussions in Congress, new alliances, and new divisions, the country continues to near the brink of fiscal calamity.
What seems clear is that the battle to constrain state spending was already lost at the commission stage. Solís’s government, given their desire to increase taxes and spending at any cost, were not prepared to take no as an answer from Congress.
Translated by Laurie Blair. Edited by Fergus Hodgson.