Venezuela Raises Sales Tax and Internal Debt, Maintains Social Spending, to Cope with Oil Price Decline

Mérida, March 23rd 2009 (Venezuelanalysis.com) — Venezuela will raise taxes, increase internal debt, cut unnecessary government spending, and keep social spending intact in its effort to endure the global financial crisis, which has lowered the demand and price of oil, Venezuela's principal export.

President Hugo Chávez announced the highly anticipated measures in a nationally televised broadcast Saturday afternoon.

In contrast to fervid speculation in the oppositional media over the past week, Chávez announced there will be no increase in the domestic price of gasoline, which is heavily subsidized, and no devaluation of the Venezuelan currency, the bolivar, which has been fixed at 2.15 per dollar since 2004.

Chávez promised to increase the minimum wage by 20% in 2009, in line with inflation, which the Finance Ministry has estimated will be between 15% and 20% this year. The inflation rate has been 24.4% over the past twelve months, as Venezuela's twenty-trimester economic growth streak decelerated from 8.4% in 2007 to 4.9% in 2008.  

The president reiterated his administration's commitment to its extensive social programs that have cut poverty in half over the past decade. "What we will not cut are social and productive investments: health, education, and the missions," he said.

Venezuela planned its national budget for 2009 based on an average price of $60 per barrel of oil, but the deepening global financial crisis brought prices down to the range of $30 per barrel at the start of the year. Oil prices rose, following two supply reductions by the Organization of Oil Exporting Countries (OPEC), of which Venezuela is a member, to the mid-$40 range.

Now, the national budget has been adjusted to an average $40 barrel of oil in 2009, Chávez said. The budget will thus be reduced by 6.7% relative to the earlier 2009 budget, from 167.5 billion bolivars ($77.9 billion) to 156.4 billion bolivars ($72.7 billion).

To generate revenue, Venezuela will increase its national Value Added Tax (IVA) from 9% to 12%, and increase internal debt from by 22 billion bolivars, from 12 billion ($5.6 billion) to $34 billion ($15.8 billion).

Planning and Development Minister Jorge Giordani said the increase in internal debt and the IVA are modest relative to Venezuela's economy, and that these measures will cover the losses incurred as a result of the decline in oil prices. "We have made the calculations, and our internal financial sector has the capacity to do it," Giordani said in a televised interview.

To cut government costs, Chávez said there will be a cap on the salaries of top government officials including the president, but he did not specify what the limit would be. In addition, there will be limits to what government institutions are permitted to spend on vehicles, cell phones, parties, furniture, publicity, technological upgrades, and travel. He also demanded that government officials take the initiative to lower their own salaries and bonuses.

"We are going to cut back on unnecessary spending… I am not talking about the workers' salaries, but about the high-level functionaries," said Chávez before unleashing harsh critiques of the leaders of some government institutions who have partitioned budget surpluses in bonuses to themselves and their allies.

Moreover, all government institutions will undergo revisions of their operations in order to consolidate functions and trim costs, Chávez said. In early March, Chávez already eliminated two of his ministries and shuffled the functions of others to make the executive branch more efficient.

In the public banking sector, Chávez said the management of all public financial institutions will be centralized, and said the nationalization of the Bank of Venezuela, which was to be purchased from the Spanish Santander group last year, will help the government strengthen its public banking based partially on the model of Brazil's Caixa Economica do Brasil.

To explain his understanding of the crisis and how the government decided on the measures announced Saturday, Chávez cited several articles he had read recently on how to deal with the global financial crisis, with authors ranging from Nobel Prize-winning former World Bank Chief Economist Joseph Stiglitz to the Argentine anti-capitalist author and Professor Atilio Borón.

The budgetary adjustments will presumably be voted into law this week by the National Assembly, which is dominated by Chávez's supporters because the opposition boycotted the 2005 National Assembly elections.