“Our proposal has been misunderstood”
President Iván Duque recently gave an interview to a Cali radio station as part of an effort to counter the negative (to put it mildly) press coverage that both student protests and his tax reform proposal have attracted. The president contended that his tax plan had been “misunderstood.” Indeed, probably no other tax reform in recent times has been battered by harsher criticism, and surely none has suffered such drastic changes during congressional debate (now entering its final stage).
The bill promised profound changes to Colombia’s VAT system, and aimed to raise COP 14 trillion (1.4% of GDP) in revenue for 2019. In that initial version, VAT revenue accounted for more than 60% of expected collections. The rest would come from higher taxes for the wealthy, and improved tax collection efficiency.
Now the VAT hike plan is all but gone, the expected yield for 2019, COP 7.0 trillion or 0.7% of GDP, is half the initial goal, and 45% of this dwindling revenue would come from sources not initially contemplated by the government.
So the challenge of meeting the 2.4% of GDP central government deficit target for next year is growing steeper by the day. Moreover, further fiscal consolidation to meet the rule targets in 2020-2023 will remain extremely difficult.
Duque’s popularity has meanwhile plummeted. College students have been striking for two months, demanding higher spending for education. Instead of talking with student leaders, Duque chose to meet with tropi-pop singer Maluma, an incident that ignited the fury of strikers and other young voters. Older people were outraged because the tax reform initially sought to tax pensions, and middle-class families also felt betrayed, since VAT-base widening targeted basically their incomes.
Concerning the economy, the recovery is slow. There is uncertainty about the real strength of the GDP growth. Its performance over the last four years has shown high dependence on public spending and non-tradable sectors, which is not sustainable in the long run. Besides, job-creating industries as Agriculture, Mining and Manufacturing, evidence relatively weak growth rates over the last years. Looking on the bright side, Household consumption and retail sales sector have rebounded sharply since last year, reaching encouraging levels.
In sum, Colombia at the moment is offering a little turmoil for everyone. Everybody seems upset with the president, Congress, the courts, the economy, the ministers, the opposition, ex-president Álvaro Uribe, the Attorney General, and so on. In a government barely four months old, this is awkward.
Whatever Duque has done so far (not much, truth be told), he doesn’t deserve such widespread condemnation. Some patience with the new government would be fair. People may see Duque as the last centrist politician to govern Colombia before the ascendance of leftist Gustavo Petro to the presidency. Hence, the very fate of Colombia may hang upon Duque’s doing a good job.
Will the president and his team get their political instincts back on track before it’s too late? Everybody’s base-case scenario should be that we’ll have some type of tax reform before yearend. More worrisomely, we are perplexed that this once-governable country is now struggling with such fundamental issues.
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