More Questions than Answers
The end of 2016 is characterized by uncertainty over the future. In politics, 2017 will be dominated by questions of presidential succession, and what kind of government Colombia’s next leader will run, after taking office in August 2018. We find the latter question the most intriguing and important, given that new governability frameworks will restrain the 2018-2022 term.
The next government will have to deal with the constitutional changes engendered by the government-FARC peace agreement. The outcomes are especially uncertain, given some of the thorniest pending issues, such as political participation of FARC members in Congress. On the other hand, the Special Jurisdiction for Peace (SJP) raises questions about how disruptive these tribunals might be. From what we’ve been able to ascertain, the SJP is already disrupting the minds of many people.
The new tax reform has fallen short, in key ways. First, comparing the proposed version with the one approved in the Senate, we can see that the latter is less structural than promised. Second, the level of projected revenue is lower than needed. We can therefore expect a new tax reform in the near (very near) future.
The fiscal burden on the private sector is still very high, compared with countries with development levels similar to Colombia’s. The corporate income tax rate is now 34%, and rises to 43% when factoring in additional taxes, such as the CREE. With the new tax reform, the effective income tax on the corporate sector will be 37% in 2018, and 42 for a foreign, dividend-distributing firm-- not a great improvement. It is unclear how the government will raise revenues to meet the fiscal rule by relying on economic activity of the corporate sector, given such high taxes and reduced productivity.
The labor market continues to deliver surprisingly good news. Unemployment in October was close to 8%. Though the labor market continues to improve against all predictions, it is doing so more slowly. And the sector upon which this improvement relies is expected to fall, given poor economic activity performance, and the new tax reform. Falling inflation is also giving the Central Bank breathing room – though inflation is falling more slowly than predicted, with non-tradable goods prices still rising. In sum, more time is required to develop a clearer picture of these two indicators, and the path the economy will follow over the medium term.
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