Iván Duque proposes raising taxes to cover Colombia’s fiscal hole created by pandemic

A tax reform, the first in Latin America motivated by the coronavirus crisis, is expected to have complicated congressional procedures.

RIO DE JANEIRO, BRAZIL – The government of Iván Duque presented on Thursday a tax reform bill that seeks to cover the fiscal hole caused by the pandemic in the Colombian public accounts. It would be the third tax reform of his mandate and the first in a Latin American country since the coronavirus caused a turnaround in the political and economic agendas of the region. The bill sent to Congress proposes a resumption of “sustainable debt paths.”

“The fiscal impact caused by the pandemic crisis has implied a vision that is not limited to the year 2020, but also affects us in 2021,” Finance Minister Alberto Carrasquilla said at a press conference in which he presented the package. The Finance Ministry estimates that the fiscal deficit in 2020 stood at 7.8 percent of GDP and could rise to 8.6 percent this year.

A tax reform, the first in Latin America motivated by the coronavirus crisis, is expected to have complicated congressional procedures. (Photo internet reproduction)

“We need to make fiscal policy taking into account a lot of considerations. The first and most important, in a medium and long-term sense, is that we have to reverse the important increases in debt,” he stressed.

The reform, which the government insists on calling “social” and which has been baptized the Sustainable Solidarity Law, will have an impact on the pockets of Colombians and should have a complicated passage through the legislature, already focused on the 2022 elections.

It was preceded by a polemic around the increase of the VAT (consumption tax) for basic products such as sugar, salt, chocolate and coffee, a measure that the Executive finally gave up. However, the 110-page text sent Thursday to Congress stipulates a VAT of 19% for public services in strata 4, 5 and 6 – the top half of consumption in the Colombian system. The basket of taxed goods would go from 39% to 43%, according to the Ministry of Finance. It will also increase in a phased manner the base of taxpayers required to pay income tax, which will now include Colombians with incomes over 2.5 million pesos (3,890 reais).

Spending caps

As for public spending, a cap is established for the national budget, with increases always below the annual inflation targets until 2026. For one semester, Duque will enjoy extraordinary authority to liquidate and restructure public agencies in order to reduce expenses.

He also commits to strengthen and focus social spending aimed at reducing poverty – he proposes that the Solidarity Income program created to mitigate the pandemic become a permanent basic income, in an amount that could vary from the equivalent of 110 to 840 reals per family, depending on the level of poverty.

The reform “is necessary to maintain the credibility, the trust that has always existed in our country, at a time when the whole planet will be competing for credit resources in the coming years,” Duque said on Wednesday. In all the discussions that preceded the presentation of the bill, the president tried to highlight a social component.

“Talking about tax [reform] is not correct. I explain it this way: the pandemic brought four major effects -poverty, unemployment, deficit and debt. Today we have to reconcile an ambitious social agenda to contain the effects in terms of poverty and unemployment, and at the same time stabilize public finances,” the president argued in an interview with EL PAÍS a month ago.

In its annual report entitled Going for Growth 2021, released on Wednesday, the Organization for Economic Cooperation and Development (OECD) said that there has been “limited progress on structural reforms in Colombia, partly related to difficulties in building a broad consensus in favor of them.”

“At the end of 2018,” it continues, “the authorities approved a much needed and welcome tax reform, which however was annulled by the Constitutional Court, forcing the Government to approve it again at the end of 2019. This long process consumed significant political capital. The covid-19 crisis could revive the appetite for discussing further structural reform, but with elections in 2022, the political window for this is short,” warned the OECD, a body Colombia joined last year.

That reform, called the Economic Growth Law, progressively reduced taxes for large companies, which ended up fueling a wave of popular protests against Duque in 2019. The street only emptied out when the confinement measures were enacted due to a health crisis that simultaneously worsened social unrest. Although Colombia is currently going through the third wave of the pandemic, worker and student organizations have already called a national strike against the new reform for next April 28th.

Social Aid

Latin America’s fourth largest economy suffered a 6.8% contraction in its gross domestic product (GDP) in 2020, the largest since records began. In making transfers to vulnerable families, it has spent on aid, loans, and guarantees the equivalent of 5.7% of its GDP, according to a report by the International Monetary Fund, and in this context its public debt has grown. The government needs to increase tax collection by at least 15 trillion pesos (23.3 billion reais, almost 1.5% of local GDP), although the text proposes to collect around 2% of GDP more.

Tax reform projects in Colombia are usually presented as structural plans to be amended in Congress, and the current one faced huge resistance before the government even revealed its terms. Although Duque has managed to consolidate legislative majorities that were previously elusive to him, political leaders from various sectors have voiced restrictions. “It’s going to finish off the Colombian economy,” chastised former liberal President César Gaviria, while former Vice President Germán Vargas Lleras of the Radical Change party called it a “true national disgrace.”

“Some risk rating agencies have welcomed the reform, but they will not give a verdict until the bill has completed its legislative passage,” warns Colombia Risk Analysis in a note to its clients, anticipating possible amendments depending on the political convenience of the parties.

“What they are looking for is for the government to have a long-term sustainable tax collection structure that aligns its tax structure with OECD standards, includes a serious plan to reduce debt and substantially adjusts the fiscal deficit and spending. Clearly, it will be a titanic effort for the government to align public spending, the fiscal deficit, the tax structure and expand subsidies during the current political cycle,” concludes the consulting firm.

Source: El Pais

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