Colombia has a second proposal to collect more taxes and this time it is expected to become law. The companies will contribute almost 70% of the new income, the evasion will be attacked and the Government will tighten its belt to spend less. If the initiative passes as it was sent to Congress by the Ministry of Finance, the promise of not affecting the middle class would be fulfilled, which a few months ago sparked outrage and fueled massive protests against the Government that have continued to date.
The fourth largest economy in Latin America, it has been burdened for years with debt that puts pressure on public finances. The economic crisis due to the covid-19 pandemic worsened the situation, at the same time that the Government increased its spending to soften the unemployment shock. President Iván Duque tried in April to pass an ambitious tax reform that would have made welfare programs a universal basic income, but increased the taxpayer base, taxing thousands of Colombians who today do not pay taxes because they live with an average income.
The reaction was explosive. Citizens, who had already begun to protest against inequality and poverty in 2019, took to the streets after the tax proposal. The demonstrations evolved to incorporate other discontent and the police responded with repression. Fifty people lost their lives. Finance Minister Alberto Carrasquilla resigned and the credit risk agencies cut the rating of Colombia’s sovereign debt due to the impossibility of passing a reform that would ensure the financial soundness of the Government.
It was then that José Manuel Restrepo, Minister of Commerce, took the reins of the Ministry of Finance and began to prepare a second proposal, which he sent to Congress on Tuesday. This time, the government proposes to eliminate some benefits enjoyed by large taxpayers, such as companies, and review the payment of taxes for the last five years. The Government seeks to collect the equivalent of 1% of the gross domestic product (GDP), that is, about 15.2 trillion pesos (3.9 billion dollars).
“It is a minor reform and not so ambitious, it is very likely that it will be approved,” says Benito Berber, chief economist for Latin America at the Natixis investment bank. The proposal modifies the fiscal rule, limiting indebtedness in the medium and long term. “I think it is important that the Government is very honest and says: ‘Well, other fiscal reforms are going to be necessary so that the commitment of the fiscal rule can be fulfilled,’ that is, other administrations are going to have to make other reforms. prosecutors ”.
For a decade, risk agencies rated Colombia’s sovereign debt investment grade, which translates to better interest rates. But in May, the S&P firm cut its rating and was followed by Fitch agency in early July. This triggered the departure of financial investments from the country and a depreciation of the currency, compared to its peers in Latin America. There are two conditions in international markets that have cushioned the fall of Colombian debt, explains Berber. First, rates in the United States are low and, second, the increase in oil prices, Colombia’s main export.
“The cost that Colombia has paid for losing investment grade is very limited. Now, in the medium term, or when these conditions change, the impact will be very clear, ”says Berber, on the phone from New York. “There is a direct impact of losing the degree of inflation and the cost that people pay is in direct transfers, in health, in education, in salaries to the bureaucracy.”
Compared to the sovereign debt of Mexico, also an oil-exporting country and its peer in the region, Colombian debt paid less tax at the end of last year. That changed in May and after the investment grade loss. Colombia already pays 12% of its income in interest on its debt. This is above Peru, which pays 8.4%, and Chile, which pays 4.8%, according to an analysis by Natixis. If we continue on the path of spending and collection that Colombia is going, and if the country does not make an effort to lower its debt, this percentage will rise, estimates Berber.
In Colombia, there is awareness that recovering investment grade is going to take long years, says economist Ricardo Ávila, senior analyst at the newspaper El Tiempo. “The question is how to minimize the cost,” he says. The reform “is very far from the ideal proposal for technicians. It is a proposal that does not solve the underlying problems, and the message that is inferred is that the next government is going to have to put its teeth into the issue, “he argues.
While in other countries most income taxes are paid by individuals and not by companies, in a proportion close to 70-30, in Colombia it is the other way around. There are many goods and services excluded from value added tax (VAT) and there is also a very generous regime of exemptions and deductions. “When all these issues are mixed, it is absolutely clear that Colombia is still in arrears with the famous structural tax reform,” he says. The accounts do not give, among other reasons, because the pandemic increased permanent expenses and this year’s fiscal deficit of 8.6% of GDP is the highest in the country’s history.
The backbone of Restrepo’s proposal is to raise income taxes for companies again. “That is what makes it politically palatable, but that does not mean that it is far from ideal. All analysts know that implicitly there is still a great fiscal fragility ”in a country that collects less taxes as a proportion of the size of its economy than the average for Latin America, Avila maintains. “The scenario of Colombia in the long term generates concern,” he warns.