Grant Him Power? Castillo’s Tax Ask (Part 2)

November 16, 2021

Beyond the strictly technical analysis of the request for legislative powers made by the Government, there is a substantive questioning related to the credibility of the government of President Castillo.  Although for a long time there has been a valid claim related to the use of state resources, in the current situation such a claim has become even more relevant, as the Castillo administration has failed to outline a credible economic policy that promotes private investment, quality jobs and generates wealth. Quite the contrary, the government has made several announcements in favor of the nationalization of some assets and is probably supporting an even more rigid labor system than the current one.

On the economic policy side, there are no known measures that favor the country's competitiveness, with the focus apparently on transfers and subsidies. Moreover, the government has been passing emergency decrees to incorporate additional resources into the budget approved by Congress, compromising the institutional framework of public finances with little transparency regarding the use of these resources. All this, when proposing a higher tax collection, does nothing more than raise questions about the legitimacy of the use of state  revenues.

Finally, there are other aspects of the request for powers beyond taxes, although the aims seem confused. On the one hand, it seeks to adjust the administrative supply system and modernize the public procurement law, which could lead to an improvement in the efficiency of public spending. It also seeks to improve the regulation and supervision of the financial system in line with the Basel II standards. However, the request also includes changes in the Banco de la Nación to promote a first-tier function, that is, to grant direct and indirect credits to micro and small businesses, as well as the beneficiaries of the State's social programs. This type of initiative has historically been disastrous in the country and could generate significant losses for public finances.

In sum, there are several reasons to question a total approval of the powers requested by the executive branch, which include an inappropriate situation, technical elements of doubtful support and, in general, a lack of credibility and trust in the government that could compromise the sustainability of public finances in the medium term, all this when the positive trend of export prices has passed.