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How will the reduction of personal income tax and IASS impact the fiscal accounts?

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According to the independent body, the structural deficit down to 2.4% of GDP, below even what had been initially projected. Relying on this achievement, the government decided to move forward with tax relief which, in other words, means a resignation of at least part of the collection.

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Federico Oteguipartner of the firm Expansion Holding, spoke with scope.com and, although he clarified that it is difficult to give an opinion because the conditions of the reduction are not yet known, he indicated that “the suggestion of the CFA is prudent and sharable.” “A tax reduction is always good news. However, any of a permanent nature must have as a counterpart a potential growth that has a certain stability. We have to be sure that income will be received from another side, because otherwise the fiscal accounts will be affected,” warned the tax official.

The truth is that, according to the CFA, structural potential growth is not predicted that allows a measure of this nature to be taken with complete peace of mind. Meanwhile, the unknown underlying the controversy surrounding the reduction lies in how much room there is for this type of fiscal policy decisions.

How much fiscal margin is there for a tax reduction?

The margin that should exist for a reduction of this type is the subject of discussion. One way of delimiting it, Otegui points out, could be based on what is indicated by the risk rating agencies international as Moody’s, fitch either DBRSamong other.

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“The latter has stated in recent reports that a fiscal deficit of 2.1% of GDP should be enough to stabilize debt ratios, and Uruguay is not that far from that,” said the Expansion Holding tax officer.

However, the CFA’s diagnosis seems to indicate that the fiscal situation is far from being “comfortable”. In this sense, he warns that although the fiscal result improved compared to the previous year, in the in the last quarter of 2022 a substantial deterioration was seen, of close to 8 tenths of GDP. In said period, there was a slowdown in the real collection of the General Tax Directorate (DGI).

Added to this is the fact that the representation of these two taxes in total of that collection is more than relevant, especially in the case of personal income tax, whose category 2 (work income) explains the 14.5% of the cake – and the IASS, a 2.5%-, even above the corporate income tax, which is charged to companies.

“That means that any small movement in this tax is important”, considered Otegui. “I think it is for all these reasons that the CFA raises a yellow flag and asks that we be careful how we are going to finance the downgrade,” he added.

The reduction of personal income tax and IASS could have a correlate in spending

Meanwhile, if an increase in income is not foreseen in a structural way, what option is left? “Either you reduce spending or you get more into debt”says the partner of Expansion Holding.

In fact, in its report, the CFA asked the president Luis Lacalle Pou that, together with the announcements that will be made in his speech before the General Assembly, also specify How will this tax resignation be financed?.

Valeria Erramuspea specialist from E&P Contadores Consultora, explained to this medium: “In Uruguay, resources are limited and each peso that is collected is destined to cover some need of the State.”

In this sense, he added: “If we reduce the income of those resources, some of the needs will be resented”.

Is there another way?

Some consider that the reduction in personal income tax and IASS will not necessarily imply a adjustment in expense items, since the beneficiaries could turn that savings to consumption in the local market and the collection of the DGI would be rewarded via Value Added Tax (VAT). This was expressed by the national deputy of the Colorado Party, conrado rodriguezIn a recent interview with scope.com.

Otegui explained that this “could happen”, but “there is no guarantee that it will happenbecause if people save money and do not invest or spend it, no more VAT is collected”.

Even so, the specialist clarified: “We do not know if the reduction will come from a reduction in rates, from an increase in the non-taxable minimum, from an increase in deductions. There’s no information on that yet, so it’s hard to say.” All this will be known today, in the President’s announcements.

Source: Ambito

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