The Corporation of Export Guilds of Ecuador (Cordex) announced its support for the Government’s proposal to increase the value added tax (VAT) by three points if it is temporary until the change of government, i.e. until May 2025, and if it is accompanied by concrete actions to correct the “distortions in the Ecuadorian economy that affect family finances, business competitiveness and maintain fiscal deficit”.

Ecuador presents a fiscal deficit of at least 5.5 billion dollars, due to the need to inject funds into the armed forces and the police, in order to fight drug crime after the announcement of an internal armed conflict, which led the executive to propose a 3-point increase in VAT, with 12% to 15%, which did not find support in the National Assembly, where certain sectors, such as the private sector, condition the support on the temporary nature of the measure.

The dilemma of how to provide revenue to the state: if the VAT increase is temporary, it is not enough to cover the fiscal gap and would close access to international credits

Economic analyst Alberto Acosta Burneo, editor of the publication weekly analysis, He assured that the VAT increase will bring in $1.3 billion, but warned that the fiscal gap is $5.7 billion. “Be assured that, even with the VAT increase, we will discuss a new tax increase reform before December.” He stated that the only way out is to reduce useless fiscal spending.

It is right for exporters that this VAT increase of 3 points is accompanied by effective measures to correct the inefficiency of public spending, generalized subsidies and the presence of inefficient public enterprises that create permanent losses for the state.

“This increase in VAT must imperatively be temporary until the change of government, with the aim that in the new period the relevance of the measure will be evaluated according to the national context. In this sense, Cordex believes that this tax increase should not become a common practice in a state that spends inefficiently and unnecessarily. An audit and optimization of public spending is urgently needed in order to guarantee the efficient distribution of collected funds”, according to the exporters’ union.

However, the Minister of Economy and Finance, Juan Carlos Vega, explained in the National Assembly that the measure should not be temporary so that Ecuador could receive loans from multilateral organizations. “If we do not take this measure, we are closed to funding from any foreign entity. What the country needs most is funds, large amounts of funds from abroad, so that we can finance the war against insecurity and face the economic and social problems that the country has,” he told the MPs.

A three-point increase in VAT would raise $1.3 billion, according to SRI

Cordex, for its part, points out that it will support the VAT increase to the extent that the collected funds are used exclusively for strengthening public forces, both on land and in rivers and at sea. “The current insecure crisis and large fiscal deficit make it necessary that these funds be allocated as a priority in order to provide our security forces with the necessary supplies to combat organized crime.”

At this point, Acosta proposes the creation of a trust so that the funds raised by the VAT increase or any other alternative that seeks to finance the fight against insecurity will be used exclusively for this purpose and not go to a single treasury account.