SAN JOSE (Reuters) - Costa Rica’s Supreme Court on Friday validated a tax reform which aims to increase taxes and cut government worker benefits in a bid to calm fleeing investors and hold off debt downgrades.
Justice Fernando Castillo told reporters that a seven-judge panel endorsed the bill, approved by lawmakers in October and backed by the government of President Carlos Alvarado.
“The court understands this country is suffering a severe public finance crisis,” Castillo said. Opposition lawmakers had argued the government illegally railroaded the bill through the country’s legislative assembly.
Alvardo said in a late night media conference that lawmakers would “soon” hold a second vote to pass the reform “with the conviction that their affirmative vote is a responsible act for the future of Costa Rica.”
Since Alvarado announced the reform, 2-1/2 months ago, thousands of public workers have gone on strike and said that the law would hit the poor.
Worries about the country's ballooning debt have hammered its bonds and sent its colon currencyCRC= to a record low earlier this month. Moody's and Fitch have warned they could cut Costa Rica's debt rating.
Finance Minister Rocio Aguilar joined the president at his residence late Friday to tell reporters that Costa Rica’s “fiscal consolidation” would begin “today.”
“I thank hundreds of investors who have maintained their trust in Costa Rica,” she said.
Maria Isabel Cortes, the head of the country’s banking association said the court’s decision “sent a good signal to recover the confidence of investors, rating agencies and global banks.”
The main plank of the tax reform is to convert the sales tax of 13 percent to a Value Added Tax (VAT) with the same rate, which will increase the range of taxed products and services.
The bill also adjusts income tax rules and cuts government workers wages.
Writing by Michael O'Boyle; Editing by Michael Perry