A more powerful albeit disappointing Moreno
The government submitted for the Legislature’s approval the budget for 2018 together with a new “reform package” that Moreno justified as necessary “to keep schools and hospitals open on the fault of the economic mismanagement of my predecessor”.
The tax and trade duties reform contained in the package will raise some $1.4 billion for the budget, announced Minister of Finance Carlos de la Torre. An increase in the corporate income tax by three points to 25%, lower tax reductions for individuals earning a monthly salary of over $3000, a new and unclear import regime that raises import taxes to as high as 50% for many consumer products, and a capital control regulation that imposes a tax on bank cash withdrawals above $4000 are also part of this package.
The Ministry of Finance also highlighted that the 2018 budget is close to $2 billion lower than the budget in 2017. However, it shows no reduction of expenditures, as current expenses increase by $1.7 billion and public investment is up $774 million.
Also, we consider oil revenues are overestimated by around $1 billion, and tax revenues might be too optimistic if the tax reform the government proposes is not approved by the Assembly. With this in mind, our estimate for the overall balance in 2018 will be close to $6 billion, not so different from this year (or last), showing that when the figures are presented transparently, Ecuador has a structural deficit of around 6% of GDP.
On the other hand, Moreno had an important political triumph last week, when 44 of the 75 official legislators signed a letter supporting the President, his proposals, and the referendum. We remain skeptical, as many of those legislators have explicitly disapproved Question 2 of the referendum, which if decided"yes" by the people, will prevent Correa from running for re-election. Also, we fear the fiscal cost of the promises Moreno must have made to the legislators to achieve their commitment.
In any case, it is undeniable that the political stance of the president is now much stronger than before. We hope this will open a path for the government to come up with a macroeconomic plan for the next four years that truly addresses the main fiscal problems and sends positive signs to the private sector so that higher domestic and foreign investment replaces aggressive debt growth.
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