Is it or is it not a Tax Reform?

COLOMBIA - Report 01 Oct 2018 by Juan Carlos Echeverry, Andres Escobar and Mauricio Santa Maria

It was common knowledge that the proposed budget submitted by the outgoing Juan Manuel Santos administration featured a drastic cut in public investment, to lower the central government deficit from 3.1% of GDP this year to the mandated 2.4% of GDP in 2019. This would require either budget cuts or revenue hikes worth COP 14 trillion (about $4.7 billion). Part of the plan includes debt re-profiling, but since that’s a below-the-line operation, the government must still find revenues worth COP 13.5 trillion. Expanding the VAT will be crucial, since one of Finance Minister Alberto Carrasquilla’s initial proposals – to lower the income threshold for tax filing – has been jettisoned (as has one President Iván Duque campaigned on – a corporate tax cut).

Here, the plot thickens. While Carrasquilla was recently defending himself in Congress against accusations of past malfeasance, ex-president and now-senator Álvaro Uribe came to his former minister’s aid, highlighting Carrasquilla’s honesty, and technical capabilities. Then he dropped a bomb: he announced that his Centro Democrático party would not support a VAT hike for middle-income families. That could seriously derail reform, forcing the government either to scale back revenue plans, or to modify fiscal targets. So Carrasquilla has a long road ahead.

Carrasquilla simultaneously came under fire in the Senate, via an inquiry into his past actions. Had that process gone bad, an impeachment vote could have been called against the most prominent member of Duque’s cabinet. The ostensible controversy was over water bonds that Carrasquilla and his associates had restructured (after Carrasquilla left the Finance Ministry in 2007) to aid liquidity-constrained municipalities. The interest rates, investigative journalist Daniel Coronell and leftist Senator Jorge Enrique Robledo claimed, were too high, and the bonds’ 19-year maturities too long. They allege that Carrasquilla grew rich, while 117 municipalities went broke. Carrasquilla would have allegedly masterminded this plan while serving under Uribe, in 2003-2007.

This spectacle is what in Colombia is known as a “refrito:” leftovers refried with butter and spices. This “refrito” was treated as a genuinely new thing by the Liberals, Cambio Radical and the leftists, to galvanize public opinion against the government and force it to share power.

In reality, something deeper was going on: the Duque administration’s capacity to weather crises, neutralize critics and contain harsh congressional debate was being tested. Here, the jury is still out. Overthrowing Carrasquilla would have been a major victory for the left, and for independent and quasi-independent political forces – Cambio Radical and the Liberals in particular. Had this attack succeeded, Duque would have been forced to kneel to Germán Vargas-Lleras and César Gaviria, leaders of those parties. We see the whole episode as a natural warning from professional politicians: to keep your friends close, because they can easily become your enemies. And, as Sicily has taught us all, you might be forced in the end to keep your enemies even closer.

Regarding Colombia’s outlook, the recent performance of the main indicators of economic activity shows that a recovery seems to be underway. Due to the delicate fiscal situation it is difficult to keep applying fiscal stimulus to the economy. So, the recovery of oil prices appears to be the lifeline the government is awaiting to be able to navigate the next year with stronger growth rates. Also, a new dilemma for the stance of monetary policy emerges if the recovery of the economy does not fully materialize.

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