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The Deterioration of Public Finances in Costa Rica

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The Deterioration of Public Finances in Costa Rica

The Minister of the Treasury of Costa Rica has recently established a national dialog with a series of presentations regarding the fiscal problems facing Costa Rica and how to consolidate a plan to turn that around.

The public finances of Costa Rica along with the efficiency and quality of the public services that are provided have been deteriorating for years.  According to the report the main reason why that deterioration has occurred is as follows:

  1. The congress passing laws which create expenditures with no provisions on how to fund them.

  2. The lack of direction from the executive branch.

  3. Lack of mechanisms to verify how funds were spent

  4. The low tax rate which results from the application of numerous exemptions and a high level of tax evasion.

  5. The lack of flexibility in public spending due to legal and constitutional mandates.

  6. The public sector salary structure with built in automatic wage increases.

  7. The lack of flexibility and capacity to execute public investments.

As part of the solution the report urges drastic changes in the current system in order to:

  1. Strengthen the governing ability and fiscal transperancy
  2. Hold back government spending complemented by more efficiency and quality.
  3. Overhaul the tax administration and implement a simpler tax code which is progressive, fair and efficient.
  4.  More flexibility to finance the deficit at a lower cost.
  5. Increase the capacity of the government to invest in infrastructure in a profitable and socially responsible manner.

With this effort the treasury department is reaching out to all sectors of Costa Rican society to get feedback and dialog in order to develop a plan which has a better chance of approval.   This approach seems sound since at the beginning of the current administration they immediately attempted to slam a tax package upon the population without properly explaining the content.  As a result the plan encountered heavy opposition and was never passed into law.  

The reality is that drastic measures are required to strengthen public finances in Costa Rica or the pillars of Costa Rican democracy – its health care and educational system will start to deteriorate faster.

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