Between candor and carelessness
How will outgoing president Iván Duque’s last Medium-Term Fiscal Framework affect President-elect Gustavo Petro’s fiscal strategy? First, the National Central Government deficit looks dramatically better under the 2022 MTFF. Not only did the 2021 NCG deficit result come in way below expectations (8.6% of GDP vs. 7.2%), but the outlook has improved substantially. Indeed, the deficit expected for this year is no longer 7% (2021 MTFF) but 5.6% (2022 MTFF), and the 2023 deficit is projected to fall from 4.8% to 3.6%. Then in 2024 and 2025 deficits of 2% and 2.3% are projected, levels not seen at the NCG level since 1994. What happened to improve the forecast so dramatically?
Non-oil revenue sources result from the impact of higher recent GDP growth on the tax base, and from assumed improvements in tax administration efforts by Dian, while firmer oil revenues result from a higher international oil price path and, according to our discussions with MinFin officials, a more optimistic production scenario. Spending is projected to increase gradually, to 1.8 pp of GDP by the end of Petro’s term. This is due mainly to the automatic (and constitutional) rise in transfers of the NCG to sub-national administrations, which means more money for education and health, and water and sanitation. Count on a large chunk of this spending continuing.
So, the new MTFF expects more primary spending, which should be even larger due to subsidies, but banks on unpredictable oil revenues to provide a big chunk of the additional revenue of the next 10 years. Has Colombia not learned the hard way (namely, through what happened in 2014-2016) the perils of a strategy of higher permanent spending financed by unstable revenues? To add insult to injury, no further improvements to tax code are recommended.
Petro’s strategy consists, in principle, of an ambitious tax reform coupled with an even more ambitious spending package. His designated Finance Minister, José Antonio Ocampo, has estimated that his program could cost a staggering 11% of GDP. Ocampo’s appointment has been well received, but we are slightly less optimistic. His ability to juggle revenues, spending and the fiscal rule will be put to an extreme test. We are confused whether Ocampo’s and Petro’s expenditure and taxation package results from their economic candor or just blatant carelessness.
Voters in faraway regions spoke loud and clear: they expect Petro to deliver on many fronts: roads, health, education, water and sanitation, peace and credit. Delivering public goods to these regions will be a challenge, not only because of poor infrastructure and a dispersed population, but because of the control of illegal groups. Drugs, weapons and mining produce way too much money for these groups to cede control easily; they live off the absence of government presence.
In spite of the spike observed in June, inflation probably peaked and should start to go down during the second semester of the year. With concerns ranging from the current account deficit to credit growth, and of course inflation, we expect the nominal policy rate to go to 8.5% and, eventually, 9% in the next few months.
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