Juan Carlos Vega Malo assured that, if necessary, he will command the demonstrations in the street so that the assembly members approve the increase in VAT to 15%. In the worst scenario, and if tough measures are not taken now, the account of arrears or pending payments could reach $10 billion until the end of 2024, or the equivalent of 3 months without any payment in the public sector.
This January 15, 2024, during a press conference in Quito, the Minister of Economy, Juan Carlos Vega Malo, that VAT increase from 12% to 15% is inevitable in a situation where payment chain in the public sector is broken and resources are needed to pay millionaire arrears and confront the war against organized crime.
«I agree with the targeting of the fuel subsidy. We are studying it, but it cannot be done without the VAT increase. The economic problem is so great that first we have to start with the VAT, where will primarily be allocated to solving the security problem; “But resources must also be allocated to the hundreds of thousands of Ecuadorians to whom we owe money,” said Vega Malo.
According to the latest figures updated by the Ministry of Economy, in 2023 it closed with an amount of arrears of 4,547 million. 49% of this total, that is, $2,245 million, are unpaid accounts to Social Security; 24%, or $1,132 million, are arrears with local governments; another 24%, or $1,125 million are pending accounts with suppliers; and the remaining 3%, or 45 million, are debts to others.
The Minister of Economy stressed that If measures are not taken today, even if they are harsh, arrears will accumulate, in the worst scenario, for more than $10,000 million by the end of 2024, which would be equivalent to not paying anything in the public sector for 4 months.
The VAT increase will have the effect of opening financing options with multilaterals and other sources. The Government of Daniel Noboa expects that these financing options will be much greater than the $1,071 million that is expected to be collected with the 15% VAT in 2024 and with that the fiscal gap can be closed along with the measures that have already been taken:
–Increase in withholdings for large companies and banks. With which it is expected to have an additional cash flow of around $190 million each month.
– ISD that remains at 3.5%. This avoids, by not lowering the ISD to 2% as Lasso had decreed, a loss of $408.5 million in gross collection and $263.8 million in net collection.
–Tax remittance. The Government expects to have an additional collection of between $800 and $1,000 million in 2024.
The VAT increase cannot be temporary
When asked why the increase in VAT is not established as a temporary measure to fight organized crime, Vega Malo explained that this is impossible in practical terms because It is not known how long that war will last. » You can’t say it will take six months. In neighboring countries, the war against organized crime has taken years,” he added.
Regarding the economic impact of the VAT increase, Vega Malo said that in Ecuador there is a broad system of exemptions and exemptions that protect essential goods and services.
«The essential products of the basic basket do not pay VAT, medicines, basic services, rent, goods and services of the popular and Solidarity economy do not pay VAT either. This makes VAT a more progressive and fairer tax,” said the Minister of Economy.
It is true that products such as gasoline do pay VAT and there may be an impact on prices, but Vega Malo stressed that VAT is currently the most efficient and easiest tax to collect in operational terms.
«We ask the Assembly to understand the situation and approve the increase in VAT to 15%. If it is not approved we have a plan B; but plans B are always harder, more complex, with more sacrifices and more impoverishment. “I am willing to lead the demonstrations in the streets to pressure the assembly members to make the decisions that Ecuador needs,” said the Minister of Economy.
The space to cut spending is small
Vega Malo said that the Government is aware that income must be increased and expenses must be lowered. However, although he assures that they are fully committed to cutting spending, he recalled that 90% of the $10.13 billion spent on salaries during 2023 were concentrated on health, education, justice and security.
«We have very little room for maneuver to make a reduction in public spending. It is not for lack of political will. This is not a time to fire teachers or doctors«he added.
The Minister of Economy pointed out that they are trying to optimize, as far as possible, spending, especially in public companies such as Petroecuador.
Finally, Vega Malo stressed that all the efforts made now will support the fight against organized crime in one way or another.
«The most important economic measure that this Government is taking is the declared war against organized crime, which has very high costs for people and companies. “We need to finance weapons, police, military, equipment maintenance and new purchases,” he said.
According to the Vice Minister of Finance, Daniel Falconí, in the first instance, just maintaining the effort and continuing with the first measures taken in the war against organized crime could cost $1,020 million. (J.S.)
FACT.- According to the Government, at the time of assuming power there was one dollar in cash for every $25 of accounts payable. This situation continues.
Public finances are in a critical state only comparable “with the worst moments of the pandemic”