To raise or not to raise the VAT?

ECUADOR - Report 16 May 2019 by Magdalena Barreiro

Against all odds, Alianza Pais captured the presidency of the National Assembly with 78 votes – 40 from Alianza Pais, 18 from CREO and the remaining from Integracion Nacional in exchange for two vice-presidencies and at least two commissions that are under negotiation as of this writing.

Cesar Litardo (AP) is the new president, Cesar Solorzano (Sociedad Patriotica member of Integaracion Nacional) is the first vice-president, and Patricio Donoso from CREO is the second vice-president. Alianza Pais also placed two members in the Legislative Administrative Council (CAL) together with Cristina Reyes from the Social Christian Party, thus replacing the former members who pertained to the group of 32 hard Correistas. The Correistas emerged as the big losers from the legislative elections of this Tuesday, while Alianza Pais, CREO and Integracion Nacional conform a new majority in Congress.

Whether this new majority will approve the announced tax reform, which could include an increase of 2% in the VAT, is not guaranteed as legislators from CREO have insisted they will remain an “opposition” group, and the Social Christian Party has been explicit in expressing its disapproval of any tax increase.

In this scenario, the government might opt for a “divide-and-conquer” strategy, submitting an overall tax reform that does not change the VAT before November and sending a second proposal for the VAT tax alone later. In case this second bill does not achieve the necessary votes, it might pass by the authority of the law without reducing the legitimacy of the overall proposal.

The labor reform was announced by Minister Martinez for this year as well. In fact, in a recent statement, Deputy Minister of Production Yuri Parreño announced that this reform will be sent to the assembly by the end of this month as part of the so-called “Law of Productive Incentives Two” that is being prepared together with the Ministry of Finance.

In the meanwhile, Minister Martinez will submit to the assembly a proposal to reduce the legal year-over-year change in the budget from the current 15% to 5%. The proposal will also make other changes to the Public Finances Planning Code, including the progressive reduction of the current balance of $3.54b of CETES by transforming them into longer-term instruments that will be part of the debt balance to estimate the debt-to-GDP ratio.

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