LIMA (Reuters) – The government of Peru’s President Pedro Pablo Kuczynski is no longer considering cutting the value added tax (VAT) rate due to slumping government revenues as the economy slows, the country’s prime minister said Tuesday.
Trimming the VAT rate gradually to 15 percent from 18 percent had been part of Kuczynski’s economic platform as he took office a year ago, before severe flooding and a graft scandal thwarted investments and knocked Peru’s growth outlook.
Dropping the plan will likely be welcomed by the right-wing opposition that had feared a VAT reduction would widen the fiscal deficit. But it could be seen as a broken campaign promise by Kuczynski allies who expected a lower rate to stimulate the economy and encourage more people to pay the tax.
“Reducing the VAT has been ruled out,” Prime Minister Fernando Zavala told foreign media in a press conference. “Tax revenues haven’t grown in recent months and we think we have to improve that in coming years by making VAT collection more efficient.”
Kuczynski named Zavala finance minister while keeping him in his post as prime minister last month after the opposition-controlled Congress ousted the former finance minister over a scandal involving an airport contract.
Peru, the world’s second biggest copper, zinc and silver producer, has enjoyed some of the strongest growth readings and slowest inflation rates in the region this century.
But the economy will likely slow to 2.8 percent this year from 3.9 percent in 2016, even with the government’s planned fiscal stimulus, Zavala said. Next year the economy should expand by between 3.8 percent to 4 percent, he added.
The government previously forecast growth at 3 percent in 2017 and 4.5 percent in 2018.
Zavala reiterated that the government planned to expand the fiscal deficit to 3 percent of gross domestic product this year and to 3.5 percent next year to pay to rebuild parts of Peru devastated by floods this year.
“It’s a deficit increase but only for resources for the reconstruction and only for a period of 3 to 4 years,” Zavala said. “We’re taking all the measures necessary for the economy to accelerate.”
Peru will likely sell sovereign bonds again next year to finance government spending or to extend the life of the country’s debt, Zavala said.
On Monday, Peru sold some $3 billion in sol-denominated bonds that can be settled through post-trade services provider Euroclear, part of the country’s efforts to reduce debt in foreign currencies.
(Reporting By Mitra Taj; Additional reporting by Marco Aquino; Editing by Phil Berlowitz and Andrew Hay)