FinMin and Congress square off
The most interesting pistol duel of this legislature is taking place between the minister of finance and the congressional opposition. The issue at hand is a two-headed beast, composed of the 2025 budget and the so-called financing act (aka the second tax reform). The budget implicitly takes for granted the approval of the financing act, and therefore contemplates a COP 12 trillion spending increase. The sources of funds would be: i) higher taxes on patrimony, carbon, gambling and individuals; and ii) a larger fiscal space provided by anticipating a provision of the fiscal rule. The financing act also aims to reduce the corporate income tax, which visibly reduces tax collection. The only net positive fiscal effect will accrue exclusively in 2025. So the impact is negligible. The relevant question is whether this is a winnable and worthwhile duel.
The press has written about an apparent “fiscal dictatorship,” which is not the case. Approving the budget by decree does not mean that President Gustavo Petro assumes economic and budgetary dictatorial power. On the contrary, it shows that the government was unable to persuade Congress to approve the budget. Yet going the decree route would be a visible defeat of the administration, and a victory of sorts for Congress. One thing must be clear: the government cannot approve new revenues by decree to finance more expenses. Recall that the duelers could easily end up as compadres, approving everything, as has already occurred with the pension reform, where the pension funds gave in, and in the healthcare reform, where the EPSs gave in.
The national central government (NCG) headline deficit target for 2024 stands at 5.6% of GDP. This is far removed from the 4.5% of GDP initially set in the 2023 Medium-Term Fiscal Framework for this year. Although the new target is more than a full percentage point of GDP higher than the old one, everything remains within the bounds of the fiscal rule. However, looking at the evolution of the deficit this year, we could be headed for a 6.2% of GDP NCG deficit, 0.6 pp above the fiscal rule ceiling for this year. So, risks are not limited to 2025 and beyond. NCG public finances are heavily stressed vis-à-vis fiscal rule ceilings, probably more than at any other point in time in recent history.
An executive of an important oil and gas company operating in Colombia recently told us that the national government is simply useless, and lacks both will and organizational capacity. The reality they face is completely regional and differentiated, and at best must be discussed with mayors and governors. Regional authorities can provide some support for operations, and momentarily fill the current void of authority.
We think the government needs to stop its constant attacks on the private agents in the oil and gas sector; to start sending the correct signals to favor investment; and, importantly, to put together a comprehensive short-term plan to soften the effects of this pre-crisis in 2025. This means increasing efforts to achieve greater re-gasification capacity in the very short-term, to begin to negotiate and insure supply of liquid gas (GLP) to fulfill demand, and to regulate a mechanism for thermos to have enough supply of natural gas to generate electricity. Otherwise power prices could also increase, which would be an unmanageable blow to low-income families. Many people add to this short-term plan importing gas from Venezuela, which, under the current circumstances, does not seem to be an especially credible strategy. Even these measures will only be enough to alleviate the hardship for the next one or two years. Colombia is deeply in need of a set of structural measures to solve the problem in the medium term. We suspect such actions will be left for the next government to undertake. Let us hope that Venezuela does not have to come and save us.
Meanwhile, the Petro administration is more worried about finding a way to put back together the broken pieces of its peace negotiations with ELN than about rebuilding the trust and organizational capacity of the Armed Forces, or its capacity to provide public goods. Colombians are exhausted over these negotiations, the lack of commitment and progress, and the current stalemate. The 22 remaining months of the Petro administration seem too short for any meaningful progress in a 60-year entrenched regional war, which ELN seems to be winning.
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