Duque’s epiphany
The fate of the government’s tax reform proposal was, up until the beginning of the last week of November, a big unknown. It seems however, the worst part is over.
During an infrastructure congress in Cartagena on November 21st, Finance Minister Alberto Carrasquilla spoke optimistically about passing the reforma before yearend. But that very day, the street protests began -- and the political world has been suffering severe tectonic shifts ever since. As protesters have underscored the government’s weakness, politicians have used the tax reform bill as an opportunity to inflict more pain upon the Duque administration. They’ve been asking for all sorts of amendments – and have so far mostly had their way.
The ponentes shepherding the bill through Congress have asked for a VAT rebate for the poorest 20% of the population; a cut in pensioners’ health contributions; three days a year without VAT; and to extend the income tax surcharge on financial institutions from two to three years. The Finance Ministry was quick to highlight the inconvenience of the first proposal. On the second, the Ministry said it should be introduced gradually, and applied only to pensioners earning a pension equivalent to one minimum wage. On third, the Ministry said “why not?” The total cost of the changes stands at 0.06% of GDP for 2020, and 0.28% after that. What if, under a pessimistic scenario, the indirect effects on revenue generation turn out to be half what the Finance Ministry expects? By 2028, the gap could be almost 1% of GDP.
The reform has already been approved by Congress’ economic committees. As it now moves to the floor of the House and the Senate, Duque has an opening to strengthen his coalition, which he might be finally using, as Cambio Radical announced its support to the bill and might, in exchange, be joining the government.
Despite the government’s happy announcements about the October 2019 labor market numbers, it seems employment isn’t recovering yet. Though labor force participation rose between September and October 2019, it’s still one full point below its level of a year ago, indicating that pressure on the labor market is far lower. Though the situation is less negative than at mid-year, there’s no basis to speak of recovery yet.
We show that there’s an uncorrected problem of employment generation. This is not related to excess supply, but rather to declining labor demand. Recognizing this is key to designing appropriate policies to reduce unemployment, amid a slow-recovering economy. It’s time to stop saying that it’s the Venezuelans, or a problem from the past. It’s a problem of labor demand, in all likelihood related to slow growth, combined with insufficient increases in the minimum wage, stabilization of public spending and poor performance of key sectors, such as commerce, agriculture and manufacturing.
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