Published by Economist Intelligence Unit

Event

Taxes on high-end items deemed luxury by the government are to be raised, in a move by the president, Nicolás Maduro, to boost the country's ailing economy.

Analysis

In a four-hour speech, Mr Maduro announced 28 new laws, passed by decree, to tax heavily the purchases of yachts, private jets, alcoholic drinks, cigarettes and other items deemed "excessive" by the government. The measures are yet to appear in the official gazette and will not become law until they do so. The amount of the tax increases vary widely: for yachts and jets, taxes will be increased from 10% to 15%; for alcoholic drinks and cigarettes, the increase could be as much as 50%, a surprisingly high jump just before Christmas, with Venezuelans already struggling with rampant inflation.

Although the underlying goal of the tax increases is to boost fiscal revenue, by taxing luxury goods the government is also making a strong statement to its political base that the wealthy remain the enemy of the revolution. Mr Maduro made no mention in this speech of raising the world's lowest gasoline prices, which cost the government as much as US$12bn annually.

Although a step in the right direction, the changes announced by Mr Maduro will have little impact on the public finances. Annual inflation, last reported in August, is more than 60%. As 96% of Venezuela's foreign income comes from oil, the recent slide in prices for this commodity is likely to be worrying the government, although it denies this. The fall could force more pragmatic policies, although enacting any reforms that are not in step with the president's base could be politically dangerous for him. Dwindling foreign reserves, which have fallen by 30% since January 2013, have been boosted by US$2bn in recent days to US$21.4bn. Mr Maduro indicated during the speech that US$4bn would be added from a loan from China; the recent US$2bn addition is believed to be part of this amount.

Impact on the forecast

The latest tax policy announcements will have little impact on the public finances and, as a result, we have made no changes to our forecast at this time. However, we will revisit our estimate for the foreign-exchange reserves for end-2014 to reflect additional inflows from China.