Costa Rica: Prudent Spending to Support Further Fiscal Consolidation

• A lower interest burden and a reversal of one-time expenditures will see Costa Rica’s budget deficit narrow from 3.8% of GDP in 2024 to 3.3% in 2025 and further drop to 3.1% in 2026.
• Fitch Solutions expects this to bring the primary surplus to 1.5% of GDP compared to 1.1% in 2024, and just above the government’s target of 1.3%.
• In 2024, expenditure growth (6.3%) outpaced revenue growth (3.2%), largely due to a one-off COVID-19-related expense tied to vaccine procurement agreements. This should cause spending to ease in 2025, with expenditures expected to fall to 18.4% of GDP (relative to 18.9% in 2024).
• The public employment reform law, which standardises salary structures and eliminates discretionary bonuses, will also help reduce the public wage bill, historically one of the largest components of spending.
• Revenue growth will, however, remain relatively flat at 14.9% of GDP in 2025 relative to the 15.1% of GDP in 2024, as political gridlock between the executive and legislators continues to block structural tax reforms.
• Nevertheless, an increased primary surplus will help reduce the debt-to-GDP ratio from 59.8% in 2024 to 59.5% in 2025, supported by adherence to the fiscal rule. Looking ahead, the debt-to-GDP ratio is also expected to continue on a downward path.

(Source: Fitch Connect)