Collection, exemptions and competitiveness

Collection, exemptions and competitiveness

He fiscal deficit consolidated annual figure of the Uruguayan State recently rose to 4% of GDP, consequence of the drop in collection of the DGI and the increase in spending. In the last month the deficit remained, but is clearly above its level a year ago.

According to official data, as of July of this year the deficit was equivalent to 3.9% of GDP, if expenses associated with Covid (0.1%) are excluded. In July 2022 the deficit was 2.8%, of which 0.9% were Covid expenses. That is The global deficit rose from 1.9% to 3.9% of GDP in the last year, excluding expenses due to the pandemic.

The drought and the exchange difference with Argentina, among other factors, are affecting fiscal performance this year, affecting collection; The first should be corrected by 2024, but with respect to Argentina no changes are foreseen soon.

He fiscal deficit was a focus of concern in the speech of the president of the Rural Association (ARU), Patricio Cortabarría, at the closing of the Expo Prado, placing it as one of the reasons for the exchange delay and of the competitiveness problems from the country. In his analysis, the fact that the Uruguayan state spends more than it earns implies – obviously – going into debt, which results in an additional income of foreign currency to the economy to cover that deficit, impacting the exchange rate. In effect, an unsustainable expansion of spending and deficit forces – in the long run – to choose between inflation or a backwardness of the exchange rate.

In this context of concern about the deficit, Cortabarría pointed to a related issue: that of the tax exemptions. In his speech he recognized the virtues of Uruguay as a destination investments, for its credibility and institutional strength. But he stressed that, for them to materialize, many investments receive fiscal benefits of various types, within the framework of various promotion regimes. For the rural leader, this confirms that The problem of competitiveness of the economy is essentially fiscal: If it is necessary to exonerate to stimulate investment, it means that in its current tax regime, the economy is having difficulties.

This is a relevant issue in the concern about the progress of the economy and about macroeconomic management, a concern that is shared even in the ministry that leads Azucena Arbeleche. In the documents attached to the Accountabilitysubmitted to Parliament, includes – like every year – one that exhaustively analyzes the so-called Tax Expenditure, somewhat misleading name that refers to the amount that is not collected due to the various tax exemptions.

The document clarifies that “although tax expenditure (GT) is defined as the loss of revenue resulting from differential tax treatment, is not necessarily equivalent to the income that would be obtained if the exception that gives rise to it were eliminated. The recoverable amount of collection would depend, among other factors, on the effects of the change in the behavior of economic agents, something clearly complex to foresee.”

“The implementation of tax spending measures by successive governments – he continues – aims to encourage the development of activities in places or sectors in which, without the presence of that public policy, it can be presumed that they would not have been developed.” The data in the document are a key input to evaluate all these policies and – eventually – review them, recognizing that – given the historical dynamics of Uruguayan politics – the decisions of the rulers are always more likely to exonerate than to terminate exonerations; It is rare to find cases in which a benefits scheme. There are, but they confirm the rule.


What dimension do these tax exemptions or Tax Expenses have? The aforementioned document makes a specific calculation for the period 2019-2021 and adds a projection for 2022. The estimated Tax Expenditure in 2022 amounts to more than 187,000 million pesos. The figure is equivalent to 6.4% of GDP of that year. This proportion was 5.6% in 2019from which it follows that the Tax Expenditure is with a Upward trend in relation to GDP. Tax Expenditure also increases in relation to the gross collection from the DGI: pass from 29 to 32% taking the same years. It is a really high figure, beyond the fact that – as explained above – it cannot be linearly deduced that this collection would be available if the exemptions/benefits were eliminated.

What the data does illustrate is that Tax Expenditure has enormous relevance in the economy and benefit and exemption regimes are key, especially for some sectors. The most important ones in terms of amount are shared in the attached table.


Analysis of tax expenditure in Uruguay during 2022.

Likewise, given the size of the Tax Expenditure, some asymmetries between companies and workers who are in the general regime (without exemption) and those who have benefits. And asymmetries, in certain cases, can be unfair.

It must be remembered that the economy involves a dynamic of resources and production factors, which are used by various sectors, according to market opportunities, price relations, etc. In the labor market, for example, it is quite obvious that (leaving other factors unchanged) a sector that has a benefits regime will have a greater capacity to attract personnel than another. In sectoral terms, it is what is sought. In terms of balance and economic justice, emerge tensions. While a company pays taxes and they are seen in figurines to retain personnel, another is exempt and can better recruit trained personnel, sometimes coming from the first. Exemptions and benefits are a powerful economic weaponbut they have a double edge.

All these issues have to be incorporated when discussing competitiveness and eventually tax policy. It should be added that the analysis in the aforementioned document only refers to DGI taxes, but there are also diverse and important benefit regimes in the social security contributions. The fact that still more than 20% of workers do not make contributions is expressive of a pending account. And of course, in the background of all this is the composition of state spending and its productivity. Or the lack thereof.

Source: Ambito

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