Hunting in the zoo
When it comes to surprise, the January press conference to present the revised fiscal outlook did not disappoint. It was announced that the 2019 deficit was 2.5% of GDP -- far below the ceiling imposed by the relevant External Committee, and down from 3% in 2018. That would have been good news, except that the central government’s debt-to-GDP ratio rose from 49.8% to 51.2% of GDP. Without a special Ecopetrol dividend on December 23rd, the deficit would have been 2.8%, and have triggered a non-compliance with the Committee’s ceiling. As the finance minister and his deputy put it, the committee’s target was met “saltando matones” (barely making it through the Valley of Death).
The Trump administration recently determined that Colombia was no longer a “developing” economy. That would be reassuring, were not many aspects of Colombia’s institutions still developing. The tax system is one, with collection at about 18% of GDP, vs. some 34% for developed countries. To multilaterals’ recommendations that Colombia raise tax rates, Colombian tax experts respond to the effect that that would be like hunting in the zoo.That’s because the 16 tax reforms enacted since 1990 have milked the same formal entities, punishing the law-abiding citizens who already pay taxes. The crucial move would be to shift to “hunting in the jungle,” by either taxing firms now in the informal economy, reducing the threshold for individual mandatory tax filing or widening the VAT tax base.
The jury is still out on whether the latest late-2019 tax reform is an effective step in that direction. Rates were raised to 39% for the top bracket, and the government denies that this will lead to tax loss, arguing that it 1) cut effective tax rates from 72% to 55%; 2) increased the number of taxpayers from 2.3 million to 3.2 million; 3) attracted 10,500 informal taxpayers with a new, simplified regime; and 4) implemented electronic invoicing for 2/3 of transactions, and 70% of big tax payers. There will in any case be no new tax reform under Duque.
On the political front, we ask whether Duque can ever recovery his popularity among the Colombian people? Does it matter? We answer negatively to both questions. Finally, local and regional coalitions show that in Colombia politicians are not so much driven by ideology or political orientation. Once elections are over and governments take office, politicians of quite different creeds are willing to work together with a mayor they disliked two months before. Ideology is dead -- long live pragmatism!
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