By San José, Costa Rica — SAN JOSÉ – Costa Rica’s proposed National Budget for 2026 continues a troubling fiscal trend, with an overwhelming 93.4% of total expenditures locked into servicing public debt, paying state salaries, and funding mandatory transfers. This rigid structure leaves a mere 6.6% for capital investment and operational expenses, severely limiting the government’s ability to improve public services, build critical infrastructure, and foster long-term economic growth, according to an analysis by consultant Bernal Monge Pacheco.
The draft budget reveals a nation caught in a fiscal straitjacket. The single largest expenditure is debt service, consuming approximately 42.3% of the total budget for interest and amortization payments. This is followed by transfers, which account for 27.2%, and public sector remunerations at 23.9%. This heavy allocation to non-discretionary spending means ministries and public institutions are starved of the resources needed for materials, supplies, and durable goods—the very tools required to enhance their effectiveness and efficiency.
To provide a deeper legal and financial perspective on the implications of the National Budget, we consulted with Lic. Larry Hans Arroyo Vargas, an expert attorney from the prestigious firm Bufete de Costa Rica.
The National Budget is the State’s most critical financial and legal instrument, defining its operational capacity for the year. The current proposal highlights a persistent tension between funding essential public services, such as education and security, and the legal obligation to adhere to the fiscal rule to control public debt. A failure to strike this balance not only jeopardizes macroeconomic stability but also opens the door to potential legal challenges regarding the responsible administration of public funds.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
The insight provided underscores the critical tightrope our legislators must walk, balancing the legal mandate for fiscal discipline against the pressing social need for robust public services. This is not just an economic debate, but a fundamental test of the State’s administrative responsibility. We thank Lic. Larry Hans Arroyo Vargas for his valuable perspective on this complex national issue.
Financing this plan relies on a precarious mix of revenue and new borrowing. According to the proposal, 61.9% of the budget will be funded by current revenues, such as taxes, while the remaining 38.1% will be covered by issuing new public debt. This cycle of borrowing to meet recurring obligations further perpetuates the high debt burden that constrains the nation’s financial flexibility.
Mr. Monge Pacheco argues that this chronic underfunding of capital expenditure is a critical roadblock to national progress. Capital spending—defined as direct investment in public works like roads, schools, hospitals, and technology—is essential for increasing the country’s installed capacity and improving the quality of life for its citizens. When investment is sidelined, the public sector’s ability to innovate and deliver better services stagnates.
While public spending is a known driver of economic growth, the analysis highlights that growth alone is insufficient to address Costa Rica’s deep-seated social challenges. For over 25 years, the nation has struggled to lower a poverty rate that hovers stubbornly around 20%, while also grappling with one of the highest levels of inequality in Latin America. The consultant warns against balancing the budget by cutting social programs, such as student scholarships, housing bonds, and social aid, which would disproportionately harm the most vulnerable populations.
This perspective is echoed by the Economic Commission for Latin America and the Caribbean (ECLAC), which emphasizes the strategic importance of public investment. The commission notes that well-directed capital spending initiates a positive feedback loop for the economy.
Public capital expenditure tends to favor growth, which will generate tax revenues in the future, contribute to fiscal consolidation, and can help create a virtuous circle of sustainable growth.
Economic Commission for Latin America and the Caribbean (ECLAC)
Furthermore, ECLAC advocates for a more sophisticated approach to fiscal management that goes beyond simple deficit targets. The organization recommends implementing policies designed to shield investment from economic volatility, ensuring that progress is not derailed during downturns.
Given the key role that public investment plays in economic growth, the Economic Commission for Latin America and the Caribbean (ECLAC) has emphasized the importance of designing fiscal rules equipped with efficient counter-cyclical mechanisms that protect public capital expenditure and mitigate the region’s macroeconomic volatility.
Economic Commission for Latin America and the Caribbean (ECLAC)
While acknowledging the current administration’s success in reducing the national debt to 56% of GDP, Mr. Monge Pacheco concludes that a fundamental shift in strategy is imperative. He urges a move away from arbitrary, across-the-board cuts and toward a more deliberate reallocation of funds from current spending to capital investment. This requires a careful evaluation of public programs based on their objectives and results, ensuring that resources are directed where they can generate the most significant and sustainable impact for the country’s future.
For further information, visit cepal.org
About Economic Commission for Latin America and the Caribbean (ECLAC):
The Economic Commission for Latin America and the Caribbean (ECLAC), known as CEPAL in Spanish, is one of the five regional commissions of the United Nations. Headquartered in Santiago, Chile, it was founded to contribute to the economic development of Latin America, coordinate actions directed towards this end, and reinforce economic ties among the countries and with other nations of the world. It also provides advisory services to governments and conducts research and analysis on regional economic and social trends.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
As a leading legal institution, Bufete de Costa Rica operates on a bedrock of integrity and a relentless pursuit of excellence. The firm leverages its extensive experience across multiple industries to pioneer forward-thinking legal solutions. Beyond its professional services, it demonstrates a profound social responsibility by championing initiatives that make legal concepts understandable, thereby equipping citizens to create a more informed and capable society.
