Many are the estimations emerging from Lima’s consultancies about the impact of Covid-19 on economic output this year. In reality they are little more than guesses, since the impact of the crisis will depend on how long it lasts. Most agree, however, that it will provoke the deepest downturn in growth since the 1980s, possibly since the 1929 Wall Street crash.
The crisis is likely, once again, to expose the weakness of Peru’s tax system. When measured against GDP, government tax receipts are extremely low when compared with other Latin American countries, let alone those of the OECD, the club of developed countries which Peru aspires to join.
Tax evasion remains high at both ends of the income scale, while the system relies heavily on indirect taxation which falls (proportionately) heavily on the poor. José de Echave, the former environment vice-minister, cites the tax authority (Sunat) estimating that, prior to this year’s difficulties, direct tax evasion was equivalent to 50% of the direct tax yield, while that of sales tax (IGV) was around 30%.
This year tax receipts will probably decline massively due to the impact of the economic shutdown introduced to curb the pandemic.
De Echave has produced a useful chart in which he identifies those points at which, over the last 50 years, Peru has seen its tax pressure fall beneath 13% of GDP: 1983 (at the time of the Niño crisis and the Mexican debt default), the late 1980s (when hyperinflation eroded the value of tax receipts down to around 8% of GDP); 2001 (in the wake of the Asian crisis) and 2017 (due to poor policy making at the end of the Humala government and the beginning of that of Kuczynski).
Doubtless, his graph will plumb new depths this year when the full impact of Covid-19 filters through into the official figures.