A Shot of Vodka Might Help
Businesses are complaining of tax bullying, on the heels of two new tax reforms over the past four months.
The first initiative, called the Bill of Fiscal Equilibrium, levied new taxes on sugared drinks, telephone services and cigarettes, and drastically cut the limit (from $10,000 to $1089) on funds that Ecuadorians may carry out of the country without paying the 5% capital outflows tax.
The second reform, passed after the devastating April earthquakes, is called the Bill of Co-Responsible Solidarity, and raises the VAT from 12% to 14% for a year; levies a one-time 3% retroactive tax on 2015 corporate profits; and levies a one-time 0.9% tax on equity above $1 million. It also requires a contribution from all employees, of a day’s salary for every $1,000 of monthly income, up to $5,000. Proceeds are supposed to help cover earthquake costs.
Meanwhile, unemployment shot up from 4.84% in March 2015 to 7.35% in March 2016, reducing the past dynamic consumption that allowed healthy GDP growth rates and corporate profits.
The government expects to raise $309 million from the first bill, and around $1 billion from the second. Yet President Rafael Correa shows no sign of implementing real austerity in the public sector.Public jobs increased by 6% y/y in Q1 2016, at an annual cost of nearly $500 million, or half of the new revenues. As one member of the chamber of production put it: “We do not know whether we have a welfare state, or whether the private sector is transferring welfare to the state.”
With a budget deficit that without spending cuts could come in at close to 9% of GDP (even before accounting for the earthquake), suspicion is more than justified that loans, donations and taxes will be used to plug the yawning financial gap. Savings could cut the deficit to around $5 billion, but that would contract government investment drastically, with serious effects on GDP growth.
Necessity ventures have popped up all over the streets. One noticeable one is the production of orange juice to go. Sanitary tests show it is contaminated with bacteria. Social media wags have suggested that adding shots of vodka could offer a quick fix.
Two earthquakes in a month, a fiscal deficit that looks unsurmountable, a cascade of taxes and fictional government arguments to justify them: this all makes a vodka fix sound like a pretty good idea!
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