An inflation bomb that will not solve the fiscal deficit

It is a fact. The government will uncover a set of very summary decisions that, aimed at solving the enormous fiscal deficit that is accumulating, will explode an inflation bomb in the short term. And the reason is very simple. The approach remains exactly the same one that has already failed: Rentism and Control, instead of decisively betting on Development.

Of the avalanche of measures launched by the Prime Minister in his surprise package, I am going to focus on two that will come into force immediately: the growth of tariffs and the extension of the sales tax to wholesale marketing.

Since the analysis revolved around private imports, it must first be clarified that there is no tariff reduction, at least for this sector. All imports made by private companies starting in the [new year] will face tariff payments approximately 5 times higher, considering now a rate of 1x120cup (previously it was 1×24). For some products, even higher tariffs will be paid because the tariff rate will be higher. For other products, tariffs will increase less because their rate will have a discount. But it is going to rise for everyone. This increase, whether we like it or not (since this is what happens in any economy with markets restricted by supply or with low levels of competition), will probably be passed along the entire chain until reaching the price of the final consumer, with a direct impact on the power purchase of everyone’s personal income.

Added to this is also the new obligation for the private sector to pay a 10% sales tax, not only for retail marketing but also for wholesale marketing. By the way, the principle of equality that requires a tax system to demand equal taxes from taxpayers with equal conditions is not met in this case. To this day, state-owned companies do not have their wholesale sales taxed; it would be good if the reason for this difference were explained. And I hope that the result is not to extend it to the state ones as well.

But, the most important thing is that this is a deeply inflationary tax due to its cumulative effect on prices throughout the chain. The warning has been issued in every possible way. But receptive ears with decision-making capacity managed to contain it for a year. Now its defenders have returned to the charge, ignoring all warnings.

All of this takes place in a context where increases are coming in other prices with high transfer power and, therefore, with a high multiplicative potential, such as the price of fuel and electricity.

Tariffs, wholesale sales taxes, fuel and electricity are highly flammable variables. By increasing all of them, there will be no products that escape their effects.

Revenue will undoubtedly increase, but who will really pay for these increases? The final consumer: The same one that is paying for the price chaos resulting from a truncated order, and the subsequent inaction of monetary policy. What else is going to be added to the prices?

Well, yes. Increases will be added to the basic basket, state transportation, water, liquefied gas, among others that will gradually take effect.

So, to mitigate the inflationary blow, the financial authorities are going to use a tool that we already know: Price controls! Controls, limits, cost sheets, maximum profitability rates, agreed prices, inspectors, discipline, controls…. Over and over and over and over again betting on the same thing. How much more evidence is needed to demonstrate the ineffectiveness of these methods?

“The solution is to achieve greater offers,” says one of the ministers. However, what productive promotion measure came into force on January 1? What are the promotion measures that are designed to be implemented during 2024?

The stated objective is to increase budget revenues in the short term. And this is, without a doubt, an urgent need. But the approach is wrong. Increasing the obligations of approximately the same number of taxpayers who will be carrying out approximately the same level of economic activity is not going to close the budget gap. There is no way. It is the equivalent of wanting to squeeze more out of the same already ragged quilt. Next year we will be facing the same problem with much less to squeeze out.

Can something different be done for this objective? Yes, of course. Only a significant expansion of the tax base (many more taxpayers) has the potential to put us on a path of public revenue growth.

This country should aim to close the year with close to 30,000 SMEs by 2024, and then aim to reach around 100,000 in 3 years. This, in addition to being a magnificent source of supply and employment creation, in addition to directly impacting the reduction of prices through competition, in addition to being a proven and effective way to break through the blockade, could also contribute to a true expansion of the tax base, enough to reverse the fiscal deficit and even increase social spending.

This country should aim to close 2024 with more than one thousand foreign investment deals and more than three thousand for the following year, instead of the almost record number of 30 that were approved this year. You don’t have to bet everything on large investments. We need many small projects operating quickly, covering some of the infinite unmet demands at the local level, and that in the process engage Cubans in the diaspora with the capacity to influence US policy towards Cuba.

This country should aim to close 2024 with 500 fewer state-owned companies (all the inefficient ones with no future), and although another thousand state-owned companies are still protected from bankruptcy, we should aspire for the other 500 state-owned companies to operate with full autonomy, operating in market conditions, paying competitive salaries, and assuming all the risks and failures of its management.

There are many things that can be done and are not being done. Stubbornness, dogma? I don’t know. But the cost of all these errors has long been irreversible. Once again, those who decided to impose these measures under the current circumstances make the same mistake as when they imposed the new Ordinances, or tried to force banking. Necessary policies, but applied with an incorrect sequence and under inappropriate conditions, produce a result very different from what they claim to pursue.

It is a pattern that repeats itself over and over again and the responsibility is in a few hands. It is neither grounded, nor with a look to the future. It is a train with no sure destination where many people get off every day.