The great black hole of the economy

World public debt skyrocketed to US$71.6 trillion in 2022. Between 2020-2022, this debt increased by 27%, when in the eight years prior to the pandemic it had increased by 12%.

Many governments tried tax reforms to stop borrowing, but social unrest put several presidents at the stake. Liz Truss set fire to a Britain on the verge of hyperinflation, with the crazy idea of ​​lowering taxes on the rich.

The Dominican debt jumped from US$36 to US$44.6 billion between 2019-2021. However, the Dominican GDP grew 12.3% in 2021. Thus, the Debt/GDP ratio fell from 56.6%, in 2020, to 51.4 % in 2021 and 46.7% in mid-2022.

Moody’s points out that the country remains on the right track in this regard when Debt/GDP exceeds 100% in Europe, the United States and many Latin American countries.

We have great advantages globally. Strong growth, a diversified economy, and relatively low debt/GDP. But the fiscal situation is critical.

The low tax revenues are not enough to meet the growing social demands while the salary loses value day by day.

How is tax revenue spent? 22% to pay interest on the debt, 35% for education and health, 21% for salaries and a pyrrhic 15% for public investment. How much is left? ZERO.

This implies borrowing US$5 billion each year to pay the principal of the debt (US$2 billion), and the rest (US$3 billion) to finance everything else.

The budget deficit of 3% of GDP (174 billion in 2022) complements the net financing, which eventually turns into debt.

And where is the black hole? In the 285 billion of tax expenditure for exemptions and exonerations and 40% in evasion. This represents RD$600 billion (10.3% of GDP). And here is the root of the poor distribution of income.

We are the second country in the region with the lowest tax pressure (15.5% in 2021). An average lower by 9.8 and 26.9 percentage points than the average for Latin America and the OECD countries, respectively.

Meanwhile, with this low tax pressure, growth must be curbed, via interest rates to control inflation, spend more to avoid more poverty and unemployment (subsidies) and continue borrowing more expensive money to cover the budget gap.

A complex equation that must be resolved without tax reform.

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