Taxes hikes and ISA sale to raise pandemic funds

COLOMBIA - Report 01 Feb 2021 by Juan Carlos Echeverry and Andres Escobar

Increasing the scope of the welfare state and strengthening the state presence nationally, two key tenets of the 1991 Constitution, have raised government spending over the last three decades. Given the public spending pressures generated by the pandemic, and the need to start a fiscal adjustment next year to keep investment grade, a new tax reform proposal must be presented to Congress. The government is betting on one that should yield 2% of GDP, and there is talk about having it approved by June. Both ideas would be firsts: never has a Colombian tax reform produced more than 1.6% of GDP in revenue, or been proposed and approved in H1. Something like 0.7%-1% of GDP looks more likely. It is said to be focused less on VAT and more on corporate taxation, and to enjoy the support of (or at least not face the outright opposition of) the business community.

On the heels of a rumor that the Finance Ministry would use Ecopetrol to buy an important share of Interconexion Eléctrica S.A. (ISA) to raise funds to cope with the pandemic, the whole truth turns out to be even juicier: not only would the government sell its 51.4% ISA stake to Ecopetrol but would also privatize 8.5% of Ecopetrol. The first reaction to this eyepopping scheme is that it only makes sense under a very stressed fiscal scenario. Our fiscal better-angels (to use the Lincoln-Biden buzzword) feel relieved, yet our public, oil and power sector better-demons feel uneasy. We side with the Finance Minister in supporting the idea of raising enough money to fund 2021’s uncertain spending needs, but dislike meddling with the rules.

A joke told about ex-Medellín mayor Sergio Fajardo’s personality goes like this: “Sergio, what time is it?” Answer: “sometime between 8 a.m. and 4 p.m.” Fajardo has earned a reputation for not revealing any strong sentiment about anything, to the point that weak sentiment about everything seems to permeate the people’s sentiment about his soul. Part of Fajardo’s strength and appeal lies in his outsider position. His credentials are grounded in his trajectory as a mathematician and serious public official. His recent wishy-washy stance seems linked to his national stage phase, when he sought to please the more left-leaning Bogotá electorate, and ended up in a coalition characterized by extreme-left politicians. His achievements in education, social and environmental programs seem strong. His proposals for confronting the COIVD-19 crisis include Central Bank financing of government expenditure, more taxes and job creation. His programs seem well intended, responsible and socially sensitive, though seem to neglect the redesign of supply-side factors of the economy.

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