Negotiating fiscal reform an uphill battle
The government presented its tax reform proposal, which seeks to increase tax revenues by $2 billion, equivalent to 1.5% of GDP. The tax reform burden will primarily fall on individuals, due to the increase in consumption, income and property taxes, which account for 82% of the additional revenue expected, with 61% attributable to the VAT base expansion. The remaining 18% corresponds to the increase in revenue from corporate income taxes.
Demands have already begun for the government to call for a "sectoral and social dialogue," during which everyone will try to persuade the government of the harm the tax measures pose to their sectors. The rejection from business sectors and the middle class has been resounding. President Luis Abinader has promised to make concessions where necessary, within the framework of the meetings and public hearings to be held in Congress. Meanwhile, Congress has just approved the constitutional reform.
Economic performance in August 2024 has been more favorable than expected, with y/y growth for January-August reaching 5.1%. Inflation was 3.3% in September 2024 y/y, and depreciation slowed to 5.6%. Net international reserves were $14.5 billion in September.
In 2025, the government is testing budget planning based on the fiscal rule, which implies a strong restraint on the expansion of primary spending by the non-financial public sector (NFPS) if the fiscal reform is not approved. The budgeted deficit for the NFPS is 3% of GDP.
Although 5% GDP growth for 2024 has not been ruled out, we continue to project a rate closer to 4.5%, due to the heightened uncertainty surrounding the fiscal reform discussion and its impact on the postponement of investment and consumption decisions by economic agents. Inflation remains within the lower boundary of the target range in 2024. However, the uncertainty associated with the fiscal reform could push inflation toward the upper band of the target range, as companies may begin adjusting their prices in anticipation of the reform’s impact on transportation costs and inputs.
The exchange rate is expected to end 2024 at DOP 59.57 per dollar, representing a y/y depreciation of 6.1%. Net international reserves are expected to reach a maximum of $14.9 billion in 2024.
Now read on...
Register to sample a report