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Wednesday, March 17, 2010

Ecuador May Raise Corporate Taxes to Plug Budget Gap

By Nathan Gill

March 9 (Bloomberg) -- Ecuador may raise corporate taxes to help finance a $4.1 billion budget deficit swelled by the worst drought in 40 years, said Jose Andrade, an economist who works at Banco del Pichincha CA.

Tax revenue could fall by as much as $700 million this year after the drought led to energy rationing, power outages and a decline in hydroelectric power, said Andrade, a Quito-based economist at Pichincha, Ecuador’s biggest bank. He said the views are his own and do not represent those of the bank.

“The government created the budget without thinking about the impact energy shortages would have on productivity,” said Andrade, who also teaches economics at the Universidad San Francisco de Quito. “They will have to improve tax collection any way they can.”

Tax revenue will be less than the government’s $10.2 billion forecast after the drought cut agricultural and industrial output, Andrade said. President Rafael Correa will struggle to spur economic growth by boosting spending after the country’s $3.2 billion debt default in the past year and a half shut it out of international credit markets, he said.

Finance Minister Maria Elsa Viteri was out of the country and unavailable for comment, according to the ministry’s press office.

The drought and power outages that ended in January cost Ecuador about $668 million, according to a report by the Quito Chamber of Commerce. State fuel subsidies to mitigate electricity demand cost an additional $784 million, the report said.

No Proposal

The government and congressional assembly are still discussing the tax and nothing formal has been proposed, Andrade said. Companies would probably pay a flat tax this year and be able to discount part of any increase in their 2011 tax filing, he said.

“The Assembly doesn’t know for sure how much it will raise taxes by,” Andrade said. “But because the president has a majority in the Assembly, there’s a high probability that whatever he proposes would be approved.”

No bill to raise corporate taxes has been proposed or is being discussed, an assistant to Francisco Velasco, the president of the Assembly’s Economic and Tax Commission, who declined to be named because he isn’t authorized to speak publicly. Velasco didn’t respond to a telephone message or e- mailed request for comment.

GDP Growth

The government also overestimated economic growth, said Andrade. The Finance Ministry forecast gross domestic product will grow 6.8 percent this year, according to the budget. That compares with the 2 percent expansion that Andrade predicts.

“The budget is based on increases in state-spending,” Andrade said. “In terms of infrastructure projects, up till now we haven’t seen anything very strong and we’re almost through the first quarter.”

Ecuador has received $550 million in loans this year for infrastructure projects from the Inter-American Development Bank and the Caracas-based lender Corporacion Andina de Fomento, according to a statement on the President’s Web site. The Andean nation received $857.4 million in multilateral financing last year.

--Editors: Lester Pimentel, David Papadopoulos

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