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President Laura Chinchilla Announces Initiative to Control Deficit

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President Laura Chinchilla does not want to cut scholarships

Now that the Fiscal Reform Plan is dead in the water due to a high court ruling, President Laura Chinchilla took to the airwaves last night and delivered a speech that outlined a new initiative to collect resources needed to shore up the deficit, which has prompted the government into borrowing 45 percent of the cash needed to meet its obligations.

The President began her address with a reminder that previous administrations have postponed a solution to the growing deficit. She then reminded the people of Costa Rica of the social programs included as part of the government’s obligations: scholarships, school lunches, child care for working families, public safety, and more.

The high cost of borrowing money in Costa Rica was also mentioned by our President, something that affects borrowers and consumers alike, but should bring a smile to savvy institutional investors, bond traders, and even those who invest in modest instruments such as certificates of deposit. As of today, the benchmark passive rate of interest in our country is 9.5 percent. Compare that to the current 3.25 prime rate set by the Federal Open Market Committee in the United States, and you get an idea of how expensive it is to borrow money in Costa Rica -and how profitable it can be to lend.

In her address, President Laura Chinchilla reminded farmers, entrepreneurs, mortgage borrowers, and even car shoppers that the deficit is the reason they are paying high interests on their loans. She then went on to enumerate what her administration has done to cut down on expenses: salary freezes, hiring freezes, and a reduction of government appointments by 1,000. She then recalled the aims of the failed Fiscal Reform Plan.

According to the Presidential address, the alternative of not paying 60 percent of interest owed in public debt is not a good option. Neither would be the firing of 24,000 government employees or a 55 percent cut on pensions. Instead, our President announced the following four steps to reduce the deficit:

  1. Creating a new method of electronic sales slip to enforce collection of sales and Value-Added Taxes (IVA).
  2. Eliminating tax exemptions.
  3. Selling real estate held by the government.
  4. Creating a new legislative proposal that will include the following measures:
  • Freezing government salaries and high pensions
  • Freezing the budgets of the executive boards of certain institutions
  • Reducing the amount of financing extended to political parties during elections
  • Authorizing the transfer of institutional budget surpluses to the government
  • Authorizing public institutions to charge for non-essential services they provide

The President reminded the public that the steps outlined above would only amount to 0.8 percent of the Gross Domestic Product, whereas the failed Fiscal Reform Plan aimed to collect 1.5 percent. This means that under the new measures the deficit will be contained, rather than reduced.

Source: Presidencia de Costa Rica

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