External committee of the fiscal rule activates countercyclical spending clause

COLOMBIA - In Brief 17 Apr 2020 by Andres Escobar

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The external committee of the fiscal rule met on April 16th to review the fiscal situation in the context of the COVID-19 pandemic. There was great expectation around the outcome of this meeting, as the government has been forced to make decisions with considerable fiscal implications on the fly, leaving the committee's seal of approval for later.Not surprisingly, the committee gave a green light to a widening of the government's deficit and left the door opened for additional increases if needed. The approved widening is the result of three separate effects, two of which are already known to everyone: (i) lower GDP growth and (ii) the migration from Venezuela; no additional deficit space will come from lower oil prices, respecting a decision made by the committee a couple of years ago of considering expected oil prices as long-term prices.The third effect, invoked for the first time since the creation of the rule back in 2011, is extraordinarily low growth. The rule stipulates that if GDP is below potential and expected growth is more than two percentage points below potential growth, the "countercyclical spending clause" can be invoked, allowing additional spending of up to 20% of the estimated output gap.In light of these decisions, the deficit for 2020 allowed under the rule is now 4.9% of GDP (up from the previous target of 2.2% of GDP). The breakdown of the numbers is as follows: Structural deficit: 1.5% of GDP Additional deficit due to low growth (the government told the committee its revised GDP growth stands at -1.6%): 1.3% of GDP Additional deficit due to the migration from Venezuela: 0.4% of GDP Additional deficit allowed under the countercyclical spending c...