President Abinader’s decision not to submit a Tax Reform Bill to the National Congress, at this time, is perfectly sensible, rational and prudent.
First of all, the level of uncertainty in the global economy is truly alarming.
The bottlenecks that we are observing on the side of the global supply of goods and services, induced by the fractures caused in the markets as a result of the containment measures adopted by most countries, have generated considerable increases in the prices of some “commodities” that lead to think that global inflation will not be as transitory as was initially thought.
This inflation will reach our ports and there we will have to make the decision of how much of it the Government will allow to erode the purchasing power of the population. If we are sensible and responsible, we should not ask the Government to absorb all of these increases, as that would affect the Government’s ability to provide the social services it offers to the population.
Therefore, one would expect, as we have already begun to see in recent weeks, that the government will allow some of that imported inflation to gradually impact domestic prices. That decision, by itself, improves the fiscal balance.
It is foreseeable to see some kind of movement in the electricity rate.If the Government, to this inflationary outbreak that comes from abroad, had added at this time increases in rates and tax bases, the loss of purchasing power would be even greater and we all know what that could lead to.
Second, the perception is growing at a global level that the strong recovery that we have observed in the world economy from the last quarter of 2020 to the second quarter of 2021, has begun to lose intensity, largely due to bottlenecks in supply, huge increases in the prices of coal, natural gas and oil, and temporary closures of factories in the main manufacturing centers of the world as a result of the advance of the Delta variant of Covid-19.
The United States economy, which had registered a growth of 6.7% in the second quarter of this year, barely grew 2% in the third quarter. China, which had registered a growth of 7.9% in the second quarter of 2021, only grew 4.9% in the third quarter of 2021, below the expectation of 5.2% that was had.
This year, our economy has benefited from an unprecedented remittance boom. I do not think it is reasonable to expect that this boom will continue in 2022, although surely the income from tourism in 2022 will more than compensate for the potential decline in remittances. If the shocks and bottlenecks in supply do not dissipate in the coming months, we Dominicans cannot bet on strong winds of economic growth coming from abroad. If the global economy slows, ours will too. In a scenario like this, a reform such as the tax reform, which seeks to reduce a fiscal deficit and, therefore, tends to contract aggregate demand and growth, should be seen as a last resort option in a situation of inability to pay. That, however, is not the Dominican case. The rating agencies know it.
Third, it is very difficult to justify a tax reform on the basis of the potential deficit that arises from what the government wants or intends to do and not on the basis of the deficit it currently has.
The 2021 tax photograph would indicate that the reform is not necessary. From January to August of this year, the fiscal deficit was 0.2% of GDP.
I particularly think that when the year closes, the deficit will not exceed 0.6% of GDP, which implies an improvement of 7 percentage points of GDP in relation to the level of 2020. With a nominal GDP (at current prices) that will grow more than 19%, the public debt will fall about 5 or 6 points as a percentage of GDP; Even with the strong increase in collections, interest on public debt as a percentage of government income, net of donations, will end between 18.5% and 19.0%, below the initial projections of 24% to 25% that They had.
It is true that part of the substantial improvement in the fiscal situation has its origin in the very low execution of public investment, which will end up in the vicinity of 1.2% of GDP, when the country requires it and the IDB has made it known. , about 4% of GDP. But reality is reality.
The Government has established a strict protocol to guarantee total transparency in public investments and has been executing a work of purification and identification of the inventory of works in execution and paralyzed. For 2022, the Government has budgeted a capital expenditure of RD $ 130,000 million, close to 2.2% of GDP.
Hopefully it can be executed, but as a result of what we have seen this year, which will end with a public investment of less than RD $ 60,000 million, the amount budgeted for 2022 looks ambitious. Even if it succeeds, with the nominal growth of the economy and revenues and the savings in unproductive spending that have been announced, the government could accommodate the doubling of capital spending without triggering a worrying fiscal imbalance.
Fourth, the population has been affected by a pandemic for a year and a half, which seems to have increased its level of irritability and intolerance. The pandemic is not over. Even the authorities are already talking about a fourth wave. Not everyone who lost his job has got it back. Thousands of micro and small businesses have closed. The banking that lends to the micro and small business sector is witness to the damage that the pandemic generated in this segment of the economy.
Prudence advised giving the population more time to overcome what it has had to endure and face since March 2020, before submitting it to a reform that we are going to need to carry out, not now, but later.
Finally, I believe that the Government needs more time to elaborate a fiscal reform that is consistent, balanced and effective.
The texts that have circulated in the media and that we do not really know whether or not they were produced in official offices, from our point of view, do not meet these characteristics. President Abinader has done well, by pausing indefinitely in his discussion. That will give the Government time to design a reform in sequence, which can be carried out in blocks. There is nothing in the theory and practice of tax reforms that mandates or forces all tax figures to be touched at the same time.
Even, Depending on how 2022 goes and as the uncertainty in the world economy dissipates, the Government could present a first block in mid-2022, which touches one tax figure or at most two, and leaves a second block for mid-2024.
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