On realism, fantasy and pain
With the publication of the new Medium-Term Fiscal Framework, we finally have a clear picture of expectations for impacts on revenues, the deficit, debt and financing. The NCG deficit is projected to soar to 8.2% of GDP this year, from 2.5% in 2019. Fiscal consolidation is expected to start in 2021, cutting the deficit to 5.1%. Plans call for a crisis-related spending package worth 2.8% of GDP.
Though after 2020 non-crisis spending is to remain temporarily high, no crisis-related spending is anticipated by the government for 2021. We don’t consider this a realistic assumption, since unemployment and poverty will remain high well beyond 2020, and the business community will require continuous support (in part because some government-guaranteed loans will become non-performing).
NCG investment is expected to shrink from 1.9% of GDP this year to a mere 1% by 2023. This of course can only happen in Wonderland: it will be politically impossible to cut that heavily (a task that will, by the way, be mainly left to the next administration). We think investment levels below 1.5%-1.7% of GDP will be impossible to maintain. Substantial privatization revenue in 2021 and 2022 will also be required.
One of the toughest requirements is the need for “additional structural revenues” worth 2% of GDP per year, starting in 2022. That would require nothing short of an unprecedentedly huge tax reform, in income or wealth taxes, or the VAT.
Reconnecting NCG public finances with fiscal rule targets by 2022 would require cutting the NCG deficit from 5.1% of GDP in 2021 to 2.5% in 2022. This brutal 2.6% of GDP adjustment would have to happen in the middle of an election year. Invoking a suspended fiscal rule as an argument to pass the largest tax reform in recent history could lead to the end of the fiscal rule.
Is this future consistent with Colombia achieving investment grade status? Only the rating agencies can say, once they compare post-pandemic metrics globally.
Remittances have fallen in dollar but not in COP terms. Indeed, during the first five months of 2020, they reached COP 9.4 trillion, up from COP 8.9 trillion in the same period of 2019. Let’s hope this important stabilizing factor can end 2020 year at close to 2019’s COP 22 trillion.
Little did we know that someone could wake up one morning and decide to pronounce a democratically-elected president illegitimate, to impugn his election before international organizations, and to raise a stir over such claims in the media and the streets, as Gustavo Petro has. Crazy Petro seems to be agitating the status quo to avoid falling into irrelevance. President Iván Duque’s approval ratings, meanwhile, have risen and fallen in rollercoaster fashion. Duque’s recent choices for attorney general and communications minister show that he’s seeking unconditional supporters, at the expense of experience and gravitas.
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