Uruguay Sidesteps Regional Tax Frenzy in Bid to Trim Deficit

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Uruguay is committed to trimming its deficit and getting the economy on track without resorting to the big private sector tax hikes that other South American countries are seeking to pay for the pandemic, Finance Minister Azucena Arbeleche said.

Instead, President Luis Lacalle Pou slapped a temporary income tax on a small group of civil servants and redirected $660 million in unnecessary spending to fight the pandemic.

“We aren’t contemplating an increase in taxes right now -- the road to improving fiscal accounts is through greater efficiency in structural spending,” Arbeleche, one of the few female finance chiefs in the Americas, said in a video interview. “The population isn’t footing the bill.”

Uruguay Sidesteps Regional Tax Frenzy in Bid to Trim Deficit

Raising taxes, especially on businesses and the rich, to fund stimulus programs and narrow deficits has gained support across the Americas in recent months. Argentina said its new wealth tax netted $2.4 billion, while Chilean lawmakers want to raise taxes on the rich and mining companies. A poorly communicated tax bill in Colombia that would have affected the middle class and poor triggered days of rioting and bloodshed.

More efficient spending and an expected increase in tax revenue as the economy recovers will help fund $900 million in pandemic aid and lower the public sector deficit, which hit 6% of gross domestic product in 2020, to around 4.3% this year, Arbeleche said.

“Fiscal improvements can’t be postponed,“ she said.

The Finance Ministry lifted its 2021 bond funding needs by $210 million to $3.86 billion to pay the deficit and maturing debt.

“Uruguay’s spreads are at good levels. The vaccination process is very advanced with a clear plan, which makes us think that Uruguay is in a good moment for international market issuances,” she said.

Low Growth

After managing to contain the pandemic during most of 2020, Uruguay now has one of the highest levels of infections and deaths per 1 million people in the world due to complacency by its citizens, the spread of Brazil’s P1 variant and the government’s decision to forgo a hard lockdown. A vaccination program that has delivered two shots to more than a fifth of the country’s 3.5 million people is still weeks away from lowering infections.

The worsening of the pandemic has dimmed Uruguay’s near term growth outlook with the most recent central bank survey of analysts putting growth at 2.7% in 2021. GDP will probably expand 3% to 3.5% this year, Arbeleche said.

Uruguay Sidesteps Regional Tax Frenzy in Bid to Trim Deficit

Uruguay was struggling even before the pandemic triggered its first recession in 17 years with annual growth averaging just 0.9% between 2015 and 2019. The construction of a $3 billion pulp mill and related infrastructure by Finland’s UPM has thrown a badly needed lifeline to an economy that shrank 5.9% last year, but few see a return to the economic boom the country enjoyed a decade ago.

Credit rating companies have flagged low growth and high deficits as a risk to the country’s investment grade rating.

The Lacalle Pou administration temporarily waived some business taxes and expanded investment tax breaks to revive the economy. Investors have responded by pitching projects for more than $2.3 billion, Arbeleche said.

“It’s necessary to recover investment and achieve greater dynamism in the economy to create jobs,” she said.

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