At the edge of the deadlines, the destination of the tax reform and the proforma 2022 is decided

This weekend is defined, amid political tensions, the fate of two key economic proposals of the Government in front of the National Assembly. On one side is the Economic Development and Fiscal Sustainability Law (tax law), that until this afternoon was about to be voted and whose term, before entering into force by operation of law, wins this saturday. Meanwhile, as for the 2022 budget proforma, which was observed by the Legislature, there is also a deadline: Sunday the Executive must answer these observations.

This week the Vice Minister of Finance, Bernardo Orellana, assured on radio Sonorama that between Friday and Saturday the Ministry could send to the Assembly the responses to the observations made to the proforma 2022. However, he announced that none of them has been seen to be in the background, but rather in the form, so would forward the text of the proforma without changes.

Refering to Tax law handles three probable scenarios. In accordance with Santiago Mosquera, dean of the Business School of the University of the Americas (UDLA), Despite the uncertainty, the tax reform it does have a chance of being approved: possibly by the vote of a sufficient number of assembly members, as well as through the ministry of law.

For Mosquera, according to conversations he has had with executive officials, the government has been working hard to get the votes before the deadline runs out. The idea of ​​the Government is to do everything possible so that it is approved and, even, due to a matter of time, not to make use of its veto power, as he was optimistic that the legal text would remain in acceptable terms.

Instead, if the scenario were that there were no votes to be approved, most likely there would not be the votes to deny or archive it. In this sense, explain what could happen by operation of law. Mosquera stressed that for the Government it is essential that this text be approved before the end of the year, so that the new tax structure begins to take effect from January 1, 2022. The expert assures that the Government will try to be very strategic in the use of time so that the required income is not put at risk.

The Government has said that the tax reform could generate about $ 1.9 billion, but it is not entirely clear how much it could actually raise after the changes made by the Assembly.

In a third scenario, if the law will be rejected by the Assembly, this would constitute a signal to the Government not only of the difficulty of passing the tax law, but all the other reforms, with which it would be tied by the hands.

In this sense, it considers that the president Guillermo Lasso could react with more radical alternatives, among them, the crossed death.

On this last point, this week investment banking Barclays had also considered a cross-death scenario in an analysis in the event that the reform is not approved. In any case, this analysis ensured that it would be the government’s last resort, since such a scenario would generate enormous uncertainty.

Several criticisms of the law have been generated in the Assembly, accusing it of collecting and affecting the middle class, among others. However, the tax reform, according to an analysis of the Grupo Faro, has positive aspects, such as the reduction of tax expenditure.

This is an amount of income that the State legally ceases to receive to benefit certain taxpayers, areas or activities. The Faro group assures that, according to ECLAC data, the trend in the region shows that tax expenditures were at average at around 3.7% of GDP between 2015 and 2019. In Ecuador, in 2019 these reached the 5.3% of PIB. This is an even higher percentage than the investment in health (2.6%) and education (4.5%) that year.

They also consider important that, in a country of profound inequality, Aim for those who have more to contribute more. In Ecuador, the richest 10% concentrate 86.6% of the country’s wealth (or assets). In this sense, the temporary tax on both the assets of companies and individuals is positive, He says. Finally, for the Faro group it is essential that the transparent use of fiscal resources is guaranteed and social spending is prioritized.

Meanwhile, the international markets are still waiting for what happens, Mosquera said. These days there has not been much movement in terms of the prices and yields of Ecuadorian bonds. However, once the vote is taken, the market will surely react. In the event that the law is approved in the Assembly, the country risk would fall and the price of the bonds would also increase, lowering their yield.

If the text were to be approved by ministry of law, the effect on country risk could be downward, but not in a very important way. However, if the law were rejected, the country risk would rise and the bond prices would fall. (I)