Uruguay’s new left-wing government plans to lower the budget deficit through tax increases early in its term to avoid politically contentious spending cuts or additional levies later on, according to Finance Minister Gabriel Oddone.
The mandate given to President Yamandú Orsi in last November’s election “isn’t a chainsaw,” Oddone said in an interview. “People don’t think the state is corrupt. Uruguay’s social contract is guaranteed by the state.”
Orsi’s measured approach to healing public finances contrasts with the harsh austerity championed by neighbouring Argentina’s leader, Javier Milei, who has fired thousands of civil servants and shuttered entire ministries. Spending cuts would have created “enormous” political tensions and violated the government’s campaign promises, Oddone said Monday in his Montevideo office.
The government, which started its five-year term in March, is asking Congress for more tax revenue to narrow a wider-than-expected deficit and make good on pledges to boost spending on social programmes and policing.
Oddone’s budget proposes raising government revenue by 1.6 percentage points of gross domestic product by 2029, mainly through more efficient tax collection, a global minimum corporate tax on multinationals and new levies such as taxing duty-free parcels. Those moves should generate enough revenue to start cutting the deficit in earnest in 2027, the finance minister said.
The budget sees the deficit falling to 2.6 percent of GDP in 2029, when Uruguayans are due to choose a new president and Congress, from 4.1 percent this year. Critics say the administration risks missing those targets by tackling the deficit in the second half of Orsi’s term when he will face political pressure to boost spending ahead of the election. S&P Global, Moody’s Ratings and Fitch Ratings have all affirmed Uruguay’s investment grade credit rating and stable outlook in the last 12 months.
“If predictions about growth and the global outlook don’t hold any surprises for us, this scenario of fiscal convergence is enough to stabilise the ratio of debt to GDP” at sustainable levels, Oddone said.
Uruguay’s commitment to political and economic stability is paying dividends. Investors poured billions of dollars into pulp mills in recent decades, and Alphabet Inc’s Google is building a major data centre near the capital. The billionaire founders of Latin America’s biggest tech companies own homes in the country of 3.5 million people wedged between Argentina and Brazil.
However, a costly welfare state is still failing many residents, especially children under six whose poverty rate of 32 percent is more than five times that of the elderly.
Orsi’s left-wing Frente Amplio party controls the Senate but needs two votes from opposition lawmakers in the lower house to pass the five-year financial plan. Oddone didn’t rule out other measures to tame the deficit if Congress doesn’t approve tax increases or if government revenues fall short.
“All tools are on the table and all of them can be used depending on the scenario because fiscal stability is key” to social stability, he said.
Oddone’s budget forecasts growth averaging 2.4 percent a year during the government’s term, compared to just 1.1 percent in the previous decade when the pandemic and droughts battered the economy.
The government wants to make Uruguay an easier place to do business by cutting red tape, trimming export and import taxes and streamlining the approval process for investment tax breaks. Oddone didn’t rule out offering lower power rates to energy intensive projects like data centers and green hydrogen plants.
At least three companies are considering Uruguay to host new data centres, according to Isabella Antonaccio, who heads the Finance Ministry’s free-trade zone unit.
“Uruguay isn’t the only eligible location,” she said. “We as a country are proactively trying to make Uruguay the chosen location if they happen in the region.”
by Ken Parks, Bloomberg
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