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Government squeezes more investment in works in 2023 to comply with the fiscal rule

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Investments in Central Government works will be squeezed a little more in 2023 in order to comply with the fiscal rule. In the project for the Ordinary Budget Law of the Republic for next year, which the Government presented on September 1st, a capital expenditure of ¢532,026 million is included.

This figure is just 1.8% more than the 2022 budget and with forecast inflation of 4.9% for next year, this outlay would fall in real terms. It also represents 4.3% of the entire spending plan that reaches ¢12.3 million million and compared to the production forecast for next year it represents 1.1%.

Since 2011, when the Government’s indebtedness began to grow, the executed capital expenditure of the central administration (mainly including ministries) has remained below 2% of production. The amount scheduled for this year represents 1.2% of production. However, not everything programmed is executed, so the data is not comparable.

Capital expenditures include construction of buildings, purchase of land, assets, communication routes, machinery, equipment, intangibles such as software licenses, for example, among others. In the case of the Government, it also makes capital transfers to other entities so that they invest in works.

The fiscal rule, for its part, is a limit to the growth of spending that was incorporated into the Law to Strengthen Public Finances, in force since 2018, to contribute to the cleaning up of accounts. The limit is a function of government debt and production growth.

By 2023, the country must apply the strongest scenario of the rule, which arises when the debt at the end of the budget year of the previous year is equal to or greater than sixty percent (60%) of GDP, which yields a maximum growth for total spending (current and capital) in 2023 of 2.56%.

The economist and former Vice Minister of Finance, José Francisco Pacheco, estimates that as the fiscal panorama is currently contemplated, everything would mean that this decade would have the same dynamics in terms of capital spending, that is, it would continue to be squeezed. That is why the international consultant, Jorge Cornick, believes that the country should assess other ways to increase public investment.

According to the estimates included by the Ministry of Finance in the statement of reasons for the draft budget, by 2027 the Central Government’s debt would represent 64.91% of production if the fiscal consolidation program is maintained and if the placement is carried out of Eurobonds for $6,000 million between 2023 and 2026.

In the text After the pandemic: a long-term vision, in which the economist Eduardo Lizano launches the challenge for Costa Rica to become a high-income country in 2050, he indicates that in order to achieve this objective, it is necessary to ensure, among others, the financing of items such as the investment program in public infrastructure.

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Pacheco added that the picture is bleaker considering that usually only 50-65% of this capex ends up being executed.

“This will eventually start to open up the debate about how far we can continue to have a fiscal spending rule. Possibly the Government next year will see the matter even more complicated and it is possible that the third year will be more complicated”, commented Pacheco.

The economist explained that from the point of view of fiscal sustainability it is possible that the rule works well, but in terms of the impact of public spending on the development of the country there will be pressures.

“I would think that the rule could have a future life of perhaps two or three years before we begin to consider the possibility of having a balance rule that allows for a growth in spending associated with an increase in income, but income healthy, not debt”, commented Pacheco.

Another discussion, he added, is how much freedom to give to institutions that generate their own income and that could be making more active investments from resources generated by themselves.

Jorge Cornick, an international consultant, believes that in this scenario the country should think of other ways to carry out works and indicated some ideas. For example, securitizing state assets already built, while contracting their maintenance such as Route 1 and Route 32; sell State assets, but only if current spending and income have been balanced beforehand, otherwise the situation of fiscal distress would arise again in a short time and finally, he believes that the State should have the explicit obligation to use lowest-cost service delivery models, given a given quality standard.

“In many cases, public-private partnerships and the contracting of services to third parties can result in considerable savings in public resources, while increasing the quality of services, as has been shown by comparing the costs of the direct administration of Ebáis (Basic Comprehensive Health Care Teams) by the Costa Rican Social Security Fund versus contracting these services to external providers,” Cornick said.

What works can be done in 2023?

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In the explanatory memorandum of the 2023 budget project, some of the works that are planned to be done in 2023 are indicated. For example, infrastructure and equipment of the educational system, to which ¢635.7 million more are allocated in relation to 2022 ; for the construction process through turnkey modality of educational facilities. Attempts were made to obtain more detail from the Ministry of Education.

In the Ministry of Public Security, it contemplates ¢321.7 million from the tax on legal entities to carry out the construction of the II stage of the anti-drug police complex in Puntarenas, which includes the construction of the operational building and the hangar, as well as works complementary.

In addition, it projects the construction of complementary works, to adapt the facilities to what is indicated in the Occupational Health Law.

In a written response, the Ministry of Public Security explained that this is a work to complete the anti-drug police complex in Puntarenas and corresponds to the office and complementary works module. The first stage is still under construction.

He added that this project allows for more officers to work against local and international drug trafficking, directly impacting security rates in the province. It also improves the conditions of officers who remain in constant combat against organized crime.

In the Ministry of Finance, ¢878.8 million are included to attend to the purchase of software, licenses and updates, as is the case of digital certifications, updating of the corporate antivirus to protect computer equipment, purchases of software licenses for digital certificates for provide security measures in web systems on the Internet, as well as attend to the service of current licenses for Microsoft products, among others. This ministry suffered a cyber attack in April 2022. Attempts were also made to obtain more detail in the Ministry.

It also includes a remodeling project for the rooms where the security officers who are in the Presidential House stay and must stay for a week while they carry out their duties.

In the Ministry of Agriculture, turnkey constructions are included for nursery structures for projects developed for a program to insert a group of women and young people from rural areas into the agricultural sector.

The Ministry of Health includes resources to improve the infrastructure conditions of the CEN CINAI Committees (Education and Nutrition Centers and Children’s Centers for Comprehensive Care) throughout the country, among which those located in San Isidro del General, Paso Ancho, San José, San Juan de Dios de Desamparados, Guápiles de Pococí, La Rita de Pococí, Twenty-fifth of July, La Cruz neighborhood of Ciudad Quesada, Alajuela, Corredores, Golfito, La Fortuna, San Carlos, San Miguel de Desamparados, Cóbano de Puntarenas.