A rum do: The new president faces a tax revolt

THE Dominican Republic has seen healthy economic growth in recent years. But it is one of the few Latin American countries where income distribution has become more unequal over the past decade. That is partly because the state does little to help the poor: the tax take, at 12.8% of GDP, is the region’s third-lowest. To make matters worse for the new president, Danilo Medina, who took office in August, he discovered that this year’s budget deficit would be 8% of GDP, rather than 5% as the previous government claimed.

That was partly because of a pre-election binge by Leonel Fernández, Mr Medina’s predecessor and ally. But it was also because of rising subsidies to electricity companies. Higher fuel prices and ageing equipment added to the chronic cost of widespread electricity theft. And slower growth curbed the growth of tax revenues.

Mr Medina’s answer was to order a rise in value-added tax from 16% to 18% while broadening its coverage. He also sharply increased duty on cigarettes and alcohol. This enraged many Dominicans, normally a fairly apathetic lot. Businessmen forecast a steep fall in sales and several thousand people turned out to protest earlier this month. Tempers ran higher when the police killed two demonstrators.

Instead of tax rises, the protesters wanted spending cuts. They accused Mr Fernández, who had long been popular, of creating the deficit through corruption and of concealing its size. There is no evidence that he was directly involved in graft. The attorney-general recently dismissed a corruption lawsuit against him filed by a leftist politician.

But money certainly flows through the Dominican government like a sieve. The World Economic Forum, a Swiss outfit, ranks the country last for “government waste”. The state hires too many people for non-essential jobs—it has more diplomats in the United States than Brazil and the seven Central American countries combined—and pays them generously. The country’s central-bank president earns 32% more than Ben Bernanke of the United States’ Federal Reserve. Meanwhile, the government fails to fulfil a constitutional mandate to spend 4% of GDP on the country’s ineffective education system.

Mr Medina has made a few symbolic gestures to streamline the public payroll. He fired the state auditor after it was revealed that he was due to receive a large pension from a previous government job, and has eschewed the entourages Mr Fernández often took on foreign trips. But the public-sector payroll is set to rise by 2.4% above inflation in 2013.

Despite the protests, Mr Medina’s fiscal reform is likely to stick. His party holds a solid majority in Congress, and with four years until the next election, the government will hope that the voters have time to forget. But Mr Medina has been warned: he needs to reform the public sector to make it thriftier but more effective, while providing Dominicans with a reliable electricity supply and good schools. Otherwise the protesters are likely to strike again.