STATUS OF FISCAL REFORM

UNCLAS SECTION 01 OF 02 SAN JOSE 002090

SIPDIS

WHA/CEN
EB FOR WCRAFT, BMANOGUE
E FOR DEDWARDS
WHA FOR WMIELE
WHA/EPSC FOR KURS, LGUMBINER
H FOR JHAGAN
STATE PASS TO USTR FOR RVARGO, NMOORJANI, AMALITO

E.O. 12958: N/A
TAGS: ETRD ECPS ECON PREL PGOV SOCI CS
SUBJECT: STATUS OF FISCAL REFORM

REF: SAN JOSE 01455


1. (SBU) Summary. Three years after starting discussion
of the fiscal reform bill and 3 months after voting to
utilize a "fast-track" review, the Legislative Assembly
members remain far away from approving the bill.
Disagreements about the bill between political parties and
also between the President's own Social Christian Unity
Party (PUSC) and the Administration may have doomed this
tax revenue bill. Recently, Gerardo Gonzalez, the
President of the Assembly and a PUSC deputy announced that
this project is no longer the Assembly's top legislative
priority. It is unclear how this will affect President
Pacheco's self-imposed requirement to pass fiscal reform
prior to sending the United States-Central America-
Dominican Republic Free Trade Agreement (CAFTA-DR) to the
Assembly. End Summary.


2. (SBU) Despite breathing new life into the fiscal reform
bill on May 23, 2005 when the Legislative Assembly voted 38
to 19 to utilize the recently created "fast-track" review
process, major divisions about details of the tax package
soon developed between the President of the Assembly
Gerardo Gonzalez and the Administration. (Note: The fast-
track review was intended to give the Assembly the ability
to limit the time period in which amendments could be
proposed and discussed in order to quicken the legislative
process (Reftel).) Gonzalez stated that he did not think
the bill was fair to poor Costa Ricans and he insisted on
changes to various parts of the bill. Finance Minister
Federico Carrillo soon became the target of Gonzalez's and
other PUSC deputies' complaints, and in recent weeks the
public exchanges between Gonzalez and Carrillo have turned
personal and ugly, culminating in Gonzalez's demand that
Carrillo be fired.


3. (U) At first the bill's most vocal opponents were the
five Libertarian Movement party (ML) deputies, who, in an
attempt to kill the bill, proposed over one thousand
amendments on the first and only day they could do so.
Each amendment would have to be discussed and would result
in more delay. As the deputies continued to review the
bill, opposition arose within the President's own party.
The major opposition party, the National Liberation Party
(PLN),found itself in the odd role of supporting the bill
and urging deputies from the President's own party to move
forward on the Administration's self-proclaimed highest
priority.


4. (SBU) Gonzalez never followed through on his promise to
lengthen Assembly sessions and devote extra time for the
review of the fiscal reform bill. On August 31, 2005, in a
sign of how bad the relationship between Gonzalez and
Carrillo had become, Gonzalez stated that he would follow
through on this promise only if Carrillo were no longer the
Minister of Finance. The increasing number of deputies
opposing the bill also used tactics such as walking out of
the Assembly to ensure there was not a quorum, thus
stopping discussion of the bill. Carrillo has also been
accused of a lack of loyalty to the PUSC. Note:
Carrillo's mother, Joyce Zurcher, is a PLN deputy, and
there have been rumors that Carrillo would stay on as
Finance Minister if Oscar Arias, the PLN presidential
candidate in the upcoming elections, wins.


5. (U) The PUSC deputies opposed to the bill state that
Carrillo is cutting funds that were earmarked for social
programs. Federico Vargas (PUSC) criticized Carrillo for
sending to the Assembly a budget in which he moved
approximately $180 million from social programs to other
government expenses such as debt payments. Carrillo has
stated that his proposed budget deals with the current
fiscal situation in a sound manner and, unfortunately,
there is no money to pay for some social programs. He also
has made some peculiar statements about the PUSC's
political future. For example, Carrillo stated that
because of problems with corruption scandals involving
kickbacks and two PUSC ex-presidents, there is little
chance that the party will win the next election. Lilliana
Salas, a PUSC deputy, said that Carrillo's "comments are
ill-conceived and unfortunate at this time when we are
debating fiscal reform."


6. (U) President Pacheco weighed in by saying the deputies
"tell me that they want money for social programs. I say
to them, with pleasure; but give me the money by passing
fiscal reform."
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ASSEMBLY VOTES ON PRIORITIES
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7. (U) On September 1, 2005, Gonzalez offered a resolution
regarding the Assembly's legislative priority list.
Gonzalez stated that he prioritized legislative projects in
accordance with the Constitution and input from the
Constitutional Court. The resolution which officially
placed fiscal reform as number three on the priority list
was passed by 37 of the 50 deputies present.

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COMMENT
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8. (SBU) Even though not a top priority, discussions can
still continue on this bill, especially since the projects
with higher priorities are mostly at the stage of being
reviewed by Assembly Commissions and have not yet made it
to the floor for discussion. However, the vote to move
fiscal reform to the number three position in the Assembly
is a clear signal of continued waning support for the bill.
The President may choose to make fiscal reform a top
priority, which he can only do during the Extraordinary
Sessions of the Assembly which will not begin until
December. If the President does this, there is no
guarantee that the deputies' lack of support on this issue
will change.


7. (SBU) Officially, the President has not changed his
requirement that fiscal reform be passed prior to him
sending CAFTA-DR to the Assembly. It is now appearing less
likely that fiscal reform will be approved during this
Assembly's tenure which ends in May 2006. Although the
President may change his mind, especially if the Commission
of Eminent Persons reports positively on the agreement, the
fact that Pacheco has not dropped the linkage between fiscal
reform and CAFTA does not bode well for his sending CAFTA-DR
to the Assembly any time soon.
FRISBIE