Correa opts for more taxes and more debt


The earthquake in Ecuador on April 16, which resulted in 659 deaths (a figure that is still growing) and thousands of homeless, has also added to the population’s tax burden. The Government has increased VAT from 12% to 14% for a one year. For the same period, companies will pay a 3% tax on profits and individuals with assets worth more than a million dollars will pay a one-off 0.9% contribution. People who earn over a thousand dollars per month will forfeit one day’s salary each month; those making more than $2,000 will pay two days and so on, up to $5,000 a month and five days’ earnings. This tax package was sent to the National Assembly on Friday 25 April marked as urgent, i.e. to be processed within a maximum of 30 days.

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It is not known how much revenue the Government will make from these measures. The majority will come from VAT, which last year totaled $500 million per percentage point, a figure which is set to decline this year due to the fall in consumption. Optimistic estimates have predicted that the new tax package will bring in $1.5 billion, but economic analysts project a lower sum. Alongside the tax measures, the Government has also reported that it has negotiated $600 million in contingency loans with the IDB, CAF and the World Bank.

In addition to these measures, the Finance Minister, Fausto Herrera, has announced that Ecuador has requested a credit line from the International Monetary Fund (IMF). Although Herrera claimed this request was made following the earthquake, in reality negotiations were already underway in early April, when a key IMF delegation visited Quito. The visit came three months earlier than usual and was made in the context of the IMF’s annual Chapter IV assessment. Of course, it is politically convenient for Rafael Correa’s Government to use the earthquake to justify these latest negotiations with the Fund. The catastrophe provides an ideal pretext for a decision that already looked likely following the economic crisis that erupted after the fall in oil prices.

Before the earthquake, Correa didn’t know how to justify the latest approach to the IMF, as he had triumphantly touted his Government’s break from the Fund. Minister Herrera did not confirm the total value of the new credit line, but he set the tone for how the Government will politically manage the new debt. The daily Quito newspaper El Comercio reported that officials are “working on this line without conditions.”

Rafael Correa’s Government now faces two financial emergencies: the fiscal gap, for which a consolidated figure has not been given; and the reconstruction work following the earthquake, the cost of which is also unknown. In the first case, analysts speak of a $10-12 billion deficit; in the second, the initial figure given by Correa (nothing technical) was $3 billion, although some calculations are closer to $8 billion.

The emergency tax measures were preceded by another tax package, voted on by the Assembly on Tuesday April 26. This package increases tax on alcoholic beverages, cigarettes and sugary drinks. If these revenues are added to the multilateral credit lines, Correa’s Government will benefit from the most significant economic boost since the oil boom, with no fundamental cuts to public spending. This approach has provoked heavy criticism from Ecuadorian society, especially on social networks where, at least for now, dissident voices are escaping government retaliation.

Correa has not downsized the obese state he created, nor has he dispensed with lavish spending or the pointless ministerial positions awarded to some of his allies. The best example of such a position was bestowed upon Freddy Ehlers, the Minister of Good Living, who heads up a department of officials responsible for mainstreaming the need to be happy. Ehlers is just one case amongst many. The Government also employs an army of online trolls, referred to as ‘virtual soldiers,’ whose job is to harass and persecute via social networks any citizen who holds independent views or is openly opposed to the regime.

Critics are also questioning the appropriateness of new taxes in a recessionary economy which, according to IMF predictions, will decrease 4.5% this year. The measures announced by the government do not seek to revive the economy but rather to alleviate the fiscal gap and initiate a reconstruction to save Correa-ism from electoral knockout. Indeed, some analysts suspect that some revenues from the emergency tax package will go directly to the national treasury. Correa heightened these suspicions by declining to channel the taxes into a designated trust fund. Neither has he confirmed the total national external debt, which will rise with the latest deals with multilateral agencies.


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