In a move signaling a potential pivot in national fiscal policy, the administration of President Keiko Fujimori has announced a wide-ranging, technical evaluation of the country’s existing tax expenditure framework. Luis Galarreta, the President of the Council of Ministers, confirmed that the Ministry of Economy and Finance (MEF), led by Minister Elmer Cuba, will conduct an exhaustive review of all current tax exonerations and incentives, with a specific, immediate focus on the agro-export sector.
The announcement, delivered during an interview with RPP’s Ampliación de Noticias, underscores the executive branch’s intent to reconcile fiscal sustainability with the practical outcomes of state-sponsored economic incentives. As the government grapples with the challenges of budget allocation and regional development, the era of "automatic" tax benefits appears to be under rigorous re-examination.
The Core Mandate: A Technical Audit of Fiscal Policy
The directive issued by the Prime Minister is clear: the state will no longer treat tax benefits as permanent fixtures of the economic landscape. Instead, the MEF will evaluate whether these incentives continue to fulfill the socioeconomic objectives for which they were originally designed.
"We are going to review everything," Galarreta stated, emphasizing that the government has not yet reached a final decision regarding the elimination of specific benefits. The process will be technical rather than purely political, relying on the expertise of Minister Elmer Cuba’s team to determine the viability of each tax break.
The primary objective of this review is to ensure that every sol of forgone tax revenue serves a strategic purpose. By analyzing whether current exemptions are driving job creation, technological adoption, or regional development, the administration aims to modernize the tax system to better reflect current economic realities.
Chronology of the Agro-Export Debate
The tension surrounding tax benefits for the agro-export sector is not a new phenomenon, but it has reached a critical juncture following legislative developments in late 2024.
- Late 2024: The Peruvian Congress pushed for the reactivation of several tax benefits specifically targeted at the agro-export industry. This legislative push was met with immediate resistance from the Ministry of Economy and Finance.
- The MEF Stance: During the congressional debates, the MEF formally opposed the initiative, citing a significant fiscal impact estimated at S/ 1,850 million annually.
- The "Profitability" Argument: The MEF provided data highlighting that the beneficiaries of these tax breaks were not, as often claimed, small-scale farmers, but rather large-scale agro-industrial conglomerates. The ministry noted that these companies reported a 74% increase in pre-tax profits during 2023, raising questions about the necessity of continued state support for a highly profitable sector.
- Current Phase: The executive branch has now formalised the audit of these benefits. The findings from the 2024 legislative discussions are expected to serve as a foundational element in the current evaluation being conducted by the team at the MEF.
Supporting Data: The Magnitude of Tax Expenditures
To understand the scale of the government’s task, one must look at the broader context of tax expenditures. According to recent data, the projected tax expenditure for 2026 is expected to reach a staggering S/ 26,350 million, representing approximately 2.2% of the national GDP.
Breakdown of Fiscal Costs
The composition of these expenditures reveals where the government’s potential room for maneuver lies:
- IGV (Value Added Tax) Exemptions: These account for the lion’s share of the expenditure, totaling approximately S/ 20,233 million. This category includes broad exemptions for agricultural products and specific regional incentives, such as those applied to the Amazon region.
- Income Tax Incentives: These represent roughly S/ 4,382 million of the total.
The sheer volume of these figures explains why the government is prioritizing this review. In a fiscal environment where resources for public works are increasingly scarce, the administration is under pressure to identify "dead weight" in the tax system that could be reallocated to urgent social and infrastructure needs.
Official Responses and Political Strategy
Prime Minister Galarreta has been careful to frame this review as a matter of fiscal responsibility rather than an attack on any specific industry. When questioned if the agro-export sector is the only area under the microscope, Galarreta was categorical: "No. I believe that it is the right moment for the Minister of Economy to review, with his team, exactly which [benefits] are currently in place and which are not."
The Prime Minister’s approach is rooted in the practical realities of governing. During recent outreach efforts—specifically meetings with over 100 mayors across the country—Galarreta witnessed firsthand the consequences of a fragmented budget. Many municipal leaders reported receiving only 15% to 20% of the funds required for essential infrastructure projects, rendering those projects effectively impossible to complete.
"There are mayors who have received 15, 20% for a project; that is useless," Galarreta remarked, highlighting the disconnect between allocated budgets and the reality on the ground. This, he argues, is why a comprehensive fiscal audit is non-negotiable.
The Broader Implications for the Peruvian Economy
The implications of this policy shift are profound for both the private sector and the general public.
1. Realigning Private Sector Incentives
For the agro-export industry, which has been a cornerstone of Peru’s export-led growth, the uncertainty regarding tax status could influence future investment decisions. The government’s willingness to question the "necessity" of these incentives suggests that the era of favorable tax treatment for highly profitable sectors may be coming to an end.
2. Strengthening the Social Contract
By signaling that it will scrutinize tax benefits, the administration is attempting to address public concerns regarding social equity. If the government can successfully demonstrate that tax expenditures are being redirected from profitable corporations toward essential public services (such as regional infrastructure, health, and education), it may strengthen its standing with the electorate.
3. The "Fiscal Space" Challenge
The overarching goal is the creation of "fiscal space." By reducing the S/ 26,350 million in tax expenditures, the MEF aims to provide the Treasury with more liquidity to meet public obligations without resorting to increased borrowing or excessive taxation.
Challenges Ahead: Technical Rigor vs. Political Pressure
The task facing Minister Elmer Cuba is as much about political diplomacy as it is about economics. The agro-export sector is a powerful lobby with significant influence in both the legislative and business communities. Removing or scaling back these benefits will undoubtedly face stiff opposition.
The success of this initiative hinges on the "technical" nature of the evaluation. If the MEF can produce transparent, data-driven reports that clearly articulate the cost-benefit ratio of each tax exemption, they will be better positioned to defend their decisions in the face of political backlash.
Furthermore, the government must balance the need for fiscal discipline with the need for economic growth. Critics of the plan will argue that tampering with tax incentives could stifle the very industries that provide the country with foreign currency and employment. The administration must prove that its "new strategy" will foster an environment where productivity is rewarded without the need for indefinite state subsidies.
Conclusion: A Turning Point for Fiscal Governance
The announcement by the Fujimori administration marks a definitive step toward a more proactive, evidence-based approach to fiscal management in Peru. While the immediate focus is on the controversial tax benefits of the agro-export sector, the broader scope of this review suggests a fundamental shift in how the state manages its resources.
As the Ministry of Economy and Finance begins its deep dive into the nation’s tax expenditure accounts, the business community and the public will be watching closely. The outcome of this process will not only define the fiscal trajectory of the current administration but will also set a precedent for how future governments in Peru treat the delicate balance between incentivizing private investment and ensuring the state has the resources to meet the needs of all its citizens.
Ultimately, Galarreta’s message to the nation is one of transition: "We need to look closely at how the budget is coming along." In the coming months, that look will determine whether Peru moves toward a leaner, more efficient fiscal model or remains tethered to legacy systems that no longer serve the national interest.
