Fear the wolf and the shepherd

COLOMBIA - Report 30 Mar 2021 by Juan Carlos Echeverry and Andres Escobar

These are times of flawed fiscal calculations, in which projections’ failure to match subsequent reality are having negative consequences. The 2020 budget was heavily under-executed, with more than COP 41 trillion (about 4 pp of GDP) of budgeted monies left undeployed. This is a very poor performance, and could be the best example of a shot in the foot.

The government’s proposed tax reform aims for a whopping COP 30.3 trillion tax increase, equivalent to an unheard-of 2.6% of GDP. Duque has decided to go all in politically, to finance a permanent increase in spending, and tackle the fiscal consequences of Covid-19. Congress will surely salivate at the spending part, but will struggle to stomach the accompanying changes in VAT and personal income tax. Let’s hope Congress goes for the spending, but stops far short on the revenue end.

There have long been two Colombias: political Colombia (PC), and national Colombia (NC). The first, composed of those who want to govern, win elections and occupy the commanding heights, feeds itself from the public budget, and is mostly a self-serving bureaucracy and Congress that uses laws, reforms and public money to perpetuate its hold on power. NC is composed of ordinary peoples. Nowadays, President Iván Duque of course represents PC, while politicians competing for the 2022 elections aim to represent the will for change of NC. As many people and recent polls indicate, if they were to clash today, NC would probably defeat PC. Hence, PC’s latest move seems to be to avoid giving NC such an opportunity.

We were simultaneously surprised by a drastic redrafting of the 2021 financial plan, to dramatically increase public investment from COP 19 trillion to COP 48 trillion. The sheep (NC) were afraid of the wolf (i.e., Petro), but it was the shepherd (i.e., Duque) who was actually trying to eat them. The election bill swiftly collapsed. Had the constitutional redrafting succeeded, PC would have enjoyed two more years, and have avoided the 2022 election test.

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