Dominican Republic’s treasury a sieve

The Dominican Republic has seen healthy economic growth in recent years, yet it remains one of the few Latin American countries where income distribution has become more unequal during the past decade.

That is partly because the state does little to help the poor: The tax take, at 12.8 per cent of GDP, is the region’s third-lowest. To make matters worse for President Danilo Medina, who took office in August, he discovered that this year’s budget deficit would be eight per cent of GDP, rather than five per cent as the previous government had claimed.

That was partly because of a pre-election binge by President Leonel Fernandez, Medina’s predecessor and ally, but it also was because of rising subsidies to electricity companies. Higher fuel prices and aging equipment added to the chronic cost of widespread electricity theft, while slower growth curbed the growth of tax revenues.

Medina’s answer was to order a hike in the value-added tax from 16 per cent to 18 per cent while broadening its coverage. He also sharply increased the duties on cigarettes and alcohol.

This enraged many Dominicans, normally a fairly apathetic lot. Businessmen forecast a steep fall in sales, and several thousand people turned out to protest earlier this month. Tempers ran higher when the police killed two demonstrators.

Instead of tax hikes, the protesters wanted spending cuts. They accused Fernandez, who had long been popular, of creating the deficit through corruption and then concealing its size.

There is no evidence that he was directly involved in graft, however, and the attorney-general recently dismissed a corruption lawsuit against him filed by a leftist politician.

Money certainly flows through the Dominican government like a sieve, though. The World Economic Forum, based in Switzerland, ranks the country last for "government waste." The state hires too many people for nonessential jobs — it has more diplomats in the United States than Brazil and the seven Central American countries combined — and pays them generously. The country’s central-bank president earns 32 per cent more than Ben Bernanke, chairman of the United States’ Federal Reserve.

Meanwhile, the government fails to fulfill a constitutional mandate to spend four per cent of GDP on the country’s ineffective education system.

Medina has made a few symbolic gestures to streamline the public payroll. He fired the state auditor after it was revealed that he was due to receive a large pension from a previous government job, and has eschewed the entourages that Fernandez often took on foreign trips. Even so, the public-sector payroll is set to rise by 2.4 per cent above inflation in 2013.

Despite the protests, Medina’s fiscal reform is likely to stick. His party holds a solid majority in Congress and, with four years until the next election, the government will hope that the voters have time to forget.

Medina has been warned, however: He needs to reform the public sector to make it thriftier but more effective, while providing Dominicans with a reliable electricity supply and good schools. Otherwise the protesters are likely to strike again.