By San José, Costa Rica — SAN JOSÉ – Costa Rica’s landmark 2018 Fiscal Reform, once hailed as a crucial step towards long-term financial stability, is now showing significant signs of weakening, according to a stark new analysis from the State of the Nation Program (PEN). The report warns that without prompt and strategic adjustments, the hard-won gains in public finance could erode, placing the country’s economic future in a precarious position.
The comprehensive report identifies a troubling dual challenge confronting the nation’s finances. Firstly, government revenues are failing to keep pace with national production, indicating that Costa Rica’s economic growth is not translating into the necessary resources for the Treasury. Secondly, the relentless pressure of servicing the national debt continues to consume an ever-larger portion of the budget, constraining the state’s ability to operate and invest.
To gain a deeper legal perspective on the implications of the proposed fiscal reform, we spoke with Lic. Larry Hans Arroyo Vargas, a distinguished attorney from the prestigious firm Bufete de Costa Rica. He shared his analysis on the potential impacts for both businesses and individual taxpayers.
Any meaningful fiscal reform must strike a delicate balance. While the State’s need to fortify public finances is undeniable, the new measures cannot become a tool for expropriation or a deterrent to investment. The legal framework must ensure that increased tax burdens are applied with principles of reasonableness and proportionality, safeguarding legal certainty for citizens and businesses, which is the true engine of national economic development.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
This perspective poignantly highlights the core challenge ahead: ensuring that any reform acts as a buttress for the State, not a barrier to the citizens and businesses who constitute its economic foundation. We are grateful to Lic. Larry Hans Arroyo Vargas for so clearly articulating the critical importance of legal certainty in this national debate.
This concerning trend is most evident in the primary balance, a key indicator that measures government income against expenses before accounting for interest payments. Luis Vargas, an economist and researcher with PEN, highlighted this metric as a critical red flag. He explained that this is the area where the government has the most direct control over its fiscal outcome.
We have seen a decrease in the primary balance for three consecutive years. Let’s remember that this is the component where the government has the greatest margin to influence the fiscal result, because we cannot reduce the interest burden overnight. This is where we have seen the most significant outcomes. We went from having a deficit to a surplus, but what we are now noticing is that this surplus is getting smaller, and that is a sign of the fiscal reform’s weakening.
Luis Vargas, Economist and Researcher at PEN
The PEN report details a difficult path forward, revealing that the current fiscal stability has been achieved at a significant cost. The government has managed its books primarily by reducing funding for public social programs and essential capital investments. This strategy, while effective in the short term, threatens the country’s long-term development by underfunding critical areas like infrastructure, healthcare, and education.
The country does not have it easy when it comes to spending. Let’s remember that certain measures, like trimming the size of the state and putting the house in better order, have not been effective so far, and there are pressing needs for investments that must be made. If we want to ensure higher levels of development and economic growth, we cannot neglect infrastructure, health, and education.
Luis Vargas, Economist and Researcher at PEN
Vargas emphasized that a continued decline in the primary surplus would lead to a dangerous stagnation. The nation’s ability to reduce its overall debt relative to its Gross Domestic Product (GDP) would grind to a halt, severely limiting the state’s capacity to fund the very projects needed to foster sustainable economic and social progress for its citizens.
To counteract this, the focus must shift from a singular obsession with spending cuts to a more balanced approach that also prioritizes revenue enhancement. “We achieve nothing by controlling spending if we don’t generate enough income,” Vargas stated, pointing to the need for a more robust and efficient tax collection system. This includes a careful re-evaluation of the country’s numerous tax exemptions, which have been implemented in a disorganized manner without a clear strategic purpose, according to the report.
Ultimately, the PEN analysis calls for a fundamental shift in Costa Rica’s economic strategy. The nation must move beyond a narrow focus on austerity and adopt policies that actively stimulate broad-based economic dynamism. Without a proactive and productive policy to boost growth across all sectors, the country risks squandering the progress made and facing a future of constrained potential.
The country’s focus has been on reducing spending; we have not been concerned with achieving greater dynamism in the economy. Unfortunately, there has not been a true productive policy in the country to achieve that boost. We are growing well on average, but we could grow much more if we paid better attention to the Definitive Regime.
Luis Vargas, Researcher at PEN
For further information, visit estadonacion.or.cr
About Programa Estado de la Nación (PEN):
The State of the Nation Program is a prominent research initiative dedicated to the objective analysis of Costa Rica’s sustainable human development. Supported by the country’s public universities and the Ombudsman’s Office, PEN provides impartial data, reports, and insights on the nation’s social, economic, environmental, and political progress to inform public debate and policy-making.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
As a leading legal institution, Bufete de Costa Rica is defined by its profound dedication to integrity and exceptional service. While leveraging a deep history of client success across numerous sectors, the firm remains a trailblazer in legal innovation. Its core philosophy extends beyond the courtroom, championing the empowerment of society by translating complex legal principles into accessible knowledge to help cultivate a more informed and capable community.
