Experts are skeptical of Noboa’s economic plan, say country needs higher taxes, less subsidies

Dec 4, 2023 | 0 comments

Although a panel of experts says the proposal President Daniel Noboa sent to the National Assembly to boost the economy is a “step in the right direction,” they agree it does not go far enough.

Economic experts discussed Ecuador’s budget crisis on the Ecuavisa program Politically Correct.

“It is a temporary solution, a band-aide, but the country needs a much bolder plan for revitalizing the economy,” former finance minister Simón Cueva said Saturday on the Ecuvisa television program Politically Correct. “What the president suggests might bring in an additional $700 or $800 million dollars but we need $4 or $5 billion.”

Patricio Alarcón, president of the Quito Chamber of Commerce, and Verónica Artola, former director of Ecuador’s Central Bank, mostly agree with Cueva, all three suggesting that some taxes should be increased, and fuel subsidies should be reduced or eliminated.

Artola says that Ecuador’s entire taxation system requires an overhaul and that most taxes should be raised. “No one likes to talk about it, but it is a simple fact that Ecuador does not collect enough tax dollars to meet its budget needs,” she says. “Our tax collections are among the lowest in South America and until something is done to change this the country will continue to be in an economic crisis.”

She added that the reliance on oil and mining revenue to balance the budget is a misguided. “Even assuming that the resources are in the ground, the political and environmental reality is that the revenue stream is not reliable and is not a long-term solution. Just look at the Yasuni referendum results? Look at what’s happening with mining in Panama? Non-renewable assets cannot be counted on.”

A partial short-term solution to the deficit, Artola said, is to raise the VAT, currently 12%. “Ours is one of the lowest in Latin America — some countries charge twice as much as we do,” she said. “However, I don’t believe there is the political will for an increase even of the VAT, either on the part of the president or the Assembly. It is another case where politics take priority over the national wellbeing.”

Although opposed to an income tax increase, Alarcón does not object to a “small VAT boost,” but said a reduction of fuel subsidies should also be a top priority. “The subsidies cost the country almost $5 billion last year, which corresponds to the amount of the budget deficit,” he said. “The last two governments said they would address the issue but did nothing because they feared a national strike.”

Alarcón does not favor total elimination of subsidies. “At least at the beginning, we must maintain them for low-income families,” he says. “We must develop a means test to determine who benefits but people with higher incomes should pay market rates for fuel. Even the indigenous movement agrees with this, but the government has made little effort to develop a system to address it.”

In addition to subsidies, Alarcón said Noboa should focus on reducing the size of government and cut spending. “There must be reductions in programs the country cannot afford. The government must make sacrifices so it does not affect the pockets of citizens.”

According to Cueva, Noboa’s economic plan, officially the Economic Efficiency and Employment Generation Project, repeats many of former president Guillermo Lasso’s proposals. “There will be some additional revenue through the elimination of business subsidies and closing loopholes, but the call for public-private partnerships is nothing new,” he said. “And tax breaks for new investment have generated little interest. Economically and politically, Ecuador must demonstrate more stability over an extended period before major — mostly foreign — investment is possible.”

Don’t expect big changes on taxes or subsidies from the Noboa government, according to the Ecuavisa panelists.

“Because of Lasso’s cross death, Noboa will only be in office for a year and half and the next presidential campaign begins in less than a year,” Artola said. “Politically, there is no advantage in making major moves that could prove unpopular. The economy will continue to limp along, bills will continue to go unpaid and infrastructure needs will go unmet. The president will put his efforts into fighting the drug gangs and cartels, which he understands is popular for most voters.”

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