VAT hike appears to be a ‘no go’ in the National Assembly but there is no consensus on alternatives

National Assembly President Henry Kronfle says President Daniel Noboa’s proposal to increase the value added tax from 12 percent to 15 percent is “dead in the water.” He admitted he is worried, however, that other proposals to raise revenue also lack majority support.

National Assembly President Henry Kronfle

“Because of the urgency to meet government expenses, the Assembly must decide within a matter of days on an alternative,” he said. “The Finance Ministry just announced that government employees’ salaries will be delayed because of lack of funds and there is broad consensus that the war on terrorists must continue, which means it must be funded.”

Kronfle said that, as part of a compromise deal, the VAT may increase but for a limited period and at a rate less than 15%. “To reach an agreement, the Assembly could decide on parts of various proposals, including the VAT, but at this point we appear to be far away from agreement.”

Among counter proposals to the VAT hike are an increase in the ISD tax on funds sent out of the country from the current 3.5% to 6%; a wealth tax on the richest Ecuadorians; a tax on private bank profits; and an increase in the corporate tax rate.

In addition, several Assembly members favor delaying the suspension of oil production in Yasuni National Park for one to two years, and reducing fuel subsidies.

Legal experts say delaying the end of Yasuni oil operations would be rejected by the Constitutional Court since it was decided by a public vote in the May 2023 election.

Although there is wide support for reducing fuel subsidies, the process of “targeting” would take months, time the government does not have.

Some Assembly members, mostly from the Social Christian and Construye blocs, are calling for deep spending cuts. Leader of the Social Christians, former Guayaquil mayor Jaime Nebot, blames previous governments for not ordering spending cuts and allowing the national debt to rise. “[Lenin] Moreno and [Guillermo] Lasso saw this disaster coming and they did nothing,” he said.

He added: “The solution is not to raise taxes. It’s to lower spending, mostly by reducing government jobs and salaries,” he says, adding that there are more than 60,000 temporary employment contracts that can be cancelled immediately,” he says. “In addition, it is long overdue to reduce fuel subsidies and target them to the sectors that need them.”

Former government minister María Paula Romo is also urging spending cuts. “We have never recovered from Rafael Correa’s refusal to reduce the size of government when oil prices collapsed in 2014,” she says. “He gambled that prices would recover and went to the debt market, especially to China, to cover the shortfall.”

She added: “It is now time to face the fact we cannot continue to live beyond our means.”