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    Costa Rica’s government cuts public spending to reduce economic imbalance

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    By Carol Steve.
    The government of Costa Rica has announced certain measures to deal with the increase in government spending in order to improve the public financial state. According to reports on the state of Costa Rica’s public spending, the fiscal deficit in the first five months of 2010 was around $670 million. This amount was 85% more than the deficit during the same period in 2009. Reports also suggest that this aforementioned deficit accounts for 1.93% of the country’s production. With such alarming statistics on government spending, the Treasury had expected the deficit to represent 4.7% of the GDP by the end of 2010.

    Meanwhile, tax revenue saw a hike of just 5%, mostly in sales taxes as the country left the worst effects of the global economic crisis behind. However, financial experts are of the opinion that this amount is not enough to cover the unnatural hike in public spending. The major part of public spending corresponds to transferences to university funds, pensions, salaries, etc. The Treasury Minister has reported that they will soon be coming up with a solid plan to improve tax controls, mentioning some special areas such as nightlife venues, bars and restaurants.

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    Measures and actions undertaken by the Finance Ministry of Costa Rica

    As per the press release from the Finance Ministry of Costa Rica, here is a highlight of the measures and actions taken by the government to bring back the balance in the Costa Rican economy.

    • Restraint on public spending: Certain stringent measures have been taken to rein in public spending significantly: no additional hiring to fill up the present vacancies, 20% reduction of expenses authorized in the 2011 budget, systematic optimization of government purchase systems, and unambiguous tax expenditures.
    • Better control on tax evasion: An increase of 20% in Extensive and Intensive Control Actions has been implemented. The Costa Rica government has strengthened the resolution of dealing with pending tax cases and has also promised to exhaust all administrative remedies, so as to firmly declare a particular debt as liquid and payable. They have also encouraged the consumers to use credit cards and debit cards as a step to bring back the fiscal balance of the economy.

    Why is public finance considered the weakest link in Costa Rica?

    Financial experts report that the most important element that the Central Bank of Costa Rica is required to incorporate is a projection on public finances. Keeping in mind the similar economic conditions in 2010 and 2011, the biggest role played by the government is by managing the growth of fiscal deficit in the country. Although there has been a slight decline in public finances with a shortage of 5.3% in 2010 to 5.4% in 2011, it is still tough to see a noteworthy improvement in the scenario without a considerable decrease in government spending. It is expected that if the revenue increases through the tax reform, this impact would soon begin to be relevant by 2012.

    Besides the issue of public finance, it is also predicted that the output of the various productive sectors will remain similar throughout 2011 and the sectors that were strong in 2010 like the business services, transportation, agriculture and trade will continue to contribute massively to the Costa Rican economy.

    The World Bank recommends the government of Costa Rica increase its taxes as it is gradually expressing its incapability to cover the high level of public spending. The government has made promises to make modifications to the legal and economic system of the country in order to facilitate the functioning of the economy.

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    Carol Steve is a financial writer and she regularly contributes to different online finance communities. She also solves people’s financial queries in different finance and debt communities.

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