Little by little, Daniel Noboa is taking measures related to taxes that could provide liquidity to Ecuador, but they are still not enough

President Daniel Noboa’s initiative to raise the value-added tax (VAT) from 12% to 15% to finance the costs of the country’s internal war against drug gangs defies an initial campaign proposal to keep taxes from increasing.

However, according to the Fiscal Policy Observatory, Cordes and Augusto de la Torre, it is a necessary measure that represents a structural reform. Although collected in this way may not be able to cover all financing needs, it would create relief for public finances. Noboa’s government is already taking other measures that could gradually provide liquidity, but they are still insufficient.

Two new urgent laws on economic issues have just been adopted by the Parliament.

According to Jaime Carrera, executive secretary of the Observatory for Fiscal Policy (OPF), it seems that the Government has just become aware of the seriousness of the fiscal situation and has begun to take measures, because there is no other option. “Public accounts are already unmanageable and structural reforms are urgently needed.”

For Carrera, the VAT increase is among the measures that represent structural reforms. Previous measures, such as self-taxation of companies, tax amnesty, can help, but only in the short term, they are not long-term sustainable measures.

He explains that the fiscal situation, if the new emergency law on VAT is adopted by the Parliament, will continue to be serious. The fiscal deficit amounts to 5.5 billion dollars. He believes that even by keeping the ISD at 3.5%, as stated in Regulation 98 of last December, the fiscal deficit will still be high, since in 2024 the contribution to corporate assets will no longer be collected. There is no tax revenue that could have flowed in if former President Guillermo Lasso had not reversed his tax reform. We must add to that that the ITT oil block will not be exploited, he comments.

When asked about the statements of the parliamentary benches in the sense that there will be no support for the third tax law of President Noboa, in which he proposes to increase the VAT, he says that if they continue like this, it will only show “Great blindness and irresponsibility of politicians.”

Please note that if the Assembly has pledged to support this struggle, it must approve the funding method. This could be through tax increases or subsidy revisions.

As for the demands of certain social sectors in the sense that before tax increases, public spending should be reduced or debts to the Noboa group should be collected, he believes that this is correct. However, during the past governments, they tried to reduce this spending, but without success. More than 10,000 million dollars is directed to salaries, and within this area 85% is on salaries for education, health, police, army, justice, bonuses for the most vulnerable, payments for social security contributions, so it becomes almost impossible to get off. For Carrera, it must be understood that solving the fiscal problem is equivalent to preserving dollarization. “Politicians must put aside their mediocrity and irresponsibility,” he says.

For Augusto de la Torre, former head of the World Bank and professor at Columbia University, there are several reasons why it would be convenient to increase VAT at this complex time in the country.

This tax does not discourage exports or foreign investment, which are key to dollarization. It also has the advantage that producers and exporters do not pay VAT, because they refuse it or get a refund. VAT is more of a consumption tax, he says.

He assures that if you ask foreign investors, they are not worried about VAT, but to pay attention to three factors:

For example, there are countries that have good investment income despite high VAT. In the case of Chile it is 19%, and in Uruguay it is 22% and both countries have significant foreign investments.

He also comments that if there are no more fiscal resources, it will not be possible to fight insecurity, and this will result in an increase in the country’s risk indicators. This in turn could affect production, exports and investment.

For producers and the domestic market, the increase in VAT is an indirect blow (through lower consumption) which, in any case, De la Torre believes, is more than offset by the reduction of the country’s insecurity and risk.

It clarifies that this VAT increase should not be a temporary measure, but a permanent measure. “The VAT increase is a permanent tax reform, a structural improvement of the Ecuadorian tax framework.”

With the increase, Ecuador would enter the regional VAT average, which is exactly around 15%

For De la Torre, VAT in Ecuador is among the lowest in the region. Indeed, Ecuador’s VAT of 12% ranks 15th out of 18 countries. On the other hand, Uruguay has the highest VAT at 22%, and Panama has the lowest at 7%.

In the analysis of the economic reality, the Development Corporation (Cordes) believes that raising the VAT rate (which in Ecuador is significantly below the regional average of exactly 15%) is a “necessary and appropriate measure”.

Regarding the rejection of Noboa’s proposal by the parliamentary benches, Cordes points out that it is at least interesting that “Correismo, after spending the savings that should be used for emergency situations, approved the VAT increase in an undoubtedly dramatic situation, but less complex and uncertain of the present, is now opposed to a similar measure.” In this sense, the question is whether Koreaism is interested in a better-funded state to fight criminal groups.As for Social Christianity, Cordes points out that the fight against terrorism should be enough to put dogma and party interests aside and not put first dollarization (seriously threatened by the fiscal unsustainability of the country), but the safety of citizens.

“That in the middle of the war against terrorism, the state does not even have the means to pay salaries is a scenario that no one wants to experience,” says Cordes. It is also clarified that the Government, if its proposal is approved, must guarantee the efficient use of resources.

Cordes agrees that an increase in VAT would not be enough to balance the finances and therefore believes that it should be supplemented by targeting subsidies.