Ecuador - Lasso pushes a pro-business agenda
“Pro-business” is not a synonym for “fiscally responsible.”
More than two weeks after winning Ecuador’s election, President-elect Guillermo Lasso’s transition appears prepared and professionally managed. He is methodically rolling out his cabinet and announcing the direction of policies he hopes to implement while leaving enough vague space around the details for negotiations and compromise with other political factions.
The one clear point that comes through in everything Lasso has done is that he is focused on pro-business policies. Specifically, he plans tax cuts. Lasso plans a four year tax reform that will phase out the currency export tax, reduce the sales tax on small businesses, offer tax holidays to key industries, simplify the tax structure, and cut taxes on nearly every tax-paying business in the country. The tax policies promoted by Lasso are everything the business community could want.
On the other side of the ledger, Lasso’s social and spending agendas seem quite moderate. His health and infrastructure plans appear likely to moderately increase spending and education spending will likely remain steady though reorganized once negotiations with other parties take place. One of Lasso’s big proposals is to spend enough to vaccinate nine million people in the first 100 days of government. The president-elect also plans to increase the budget to the military and police. Remember the fuel subsidy cuts that led to giant protests in 2019? Lasso hasn’t said much but it looks like he is not going to touch those subsidies.
One big question to start the administration is whether Lasso tries to pass all these proposals separately or pushes them all into a giant package to win a single vote. I think he’s on track to run this all as a single negotiation and get a broad coalition in Congress to give him an early policy victory. The combination of tax cuts plus spending increases can get the votes. He’ll happily drop a few of the less popular items (i.e. expanding the taxes paid by individuals in the middle class) or add a few more spending items if it gets him the necessary votes, particularly from Yaku Perez’s allies.
The other big question: how is he going to pay for all this? The IMF has called for a tax increase and previously wanted subsidy and spending cuts (though not right this moment in the middle of a pandemic-induced recession). Unlike his political opponents, Lasso has promised to be friendly with the IMF and work with them. But much of what he is doing goes against what the IMF has recommended. In spite of the threats and worst fears of the Correistas, Lasso’s economic plans have no hint of austerity.
Lasso claims the tax cuts will pay for themselves and eliminate the fiscal deficit by generating economic growth and a more business friendly environment that leads to greater foreign investment. He also says he plans to expand the number of people paying taxes, something that is not likely to be popular with Ecuador’s middle class and may get cut or watered down in the final package. He will reform Ecuador’s tax collection system to crack down on businesses that are using loopholes to avoid paying. It all sounds nice, but I doubt those policies will come close to balancing Ecuador’s budget.
The IMF, World Bank, the Biden administration, and other international financial backers of Ecuador are going to help out Lasso early because they want to see him succeed and will give him the political and financial space to do so. He’ll get the money he needs to avoid a balance of payments crisis this year. They’re going to trust that he will make more fiscally responsible moves in the years to come once economic growth bounces back.
There are big risks there. There are no guarantees Lasso will pivot to greater responsibility in the future. Even if he does, the broad Congressional coalition that might be willing to pass his opening proposal in which everyone gets something they want will collapse into warring factions once the debate turns to more difficult decisions.
Yet, what is the alternative? Tax increases and spending cuts as recommended by the IMF won’t pass the Congress. Even if they could, they wouldn’t pass the street. Lasso is playing the hand he is dealt. He’s going to give Perez and Hervas what they want to get their support. And he’ll give his friends in the business community the best deal possible in the hopes that they bail him out in the future.
In summary, Lasso is setting himself up nicely for some early wins; the payments will come due later.
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