Settle in for a Long Wait
The government’s new tax reform plan is crucial for restoring fiscal health, and preserving Colombia’s investment grade. We expect it to be approved in a watered-down, though still decent, form by December, as the political scenario for its passage is far from ideal. That should be enough to make the rating agencies happy, at least for a while.
The plan tackles some of the most crucial issues of the tax code, aiming to reach international standards in terms of revenue levels, tax rates and composition between the corporate and individual income tax rate. But it aspires to add only a modest 0.8% of GDP in tax revenue in 2017 (rising gradually to 2.1% of GDP in 2020, and 2.7% in 2022), and, if diluted, it will be very difficult to meet fiscal rule targets. We expect the tax reform to raise revenue by only 0.5% of GDP in 2017, which would put the fiscal deficit at more like 3.8% of GDP. This implies that the government would have to modify the fiscal rule target once again.
The plan also forecasts tax revenue to surge by an additional 0.6% of GDP, permanently, after 2020, due to enhanced growth and formalization, and adds an additional 0.3% of GDP due to improved management from DIAN. This projection might be too optimistic, and indicates a shortfall of resources later.
Why did the government lose the plebiscite on the FARC peace deal? There should be an explanation out there that makes sense. It should encompass at least the acknowledgement that the YES campaign was poorly designed and delivered.
In coming months, we’ll witness masterful politicians on both sides of the Santos-Uribe divide pretending they are trying for an agreement. The government will pretend it wants to hear what the NO voters said, while actually trying to implement the agreement as it is. But disregarding the NO vote could have dire consequences for political stability. Temporarily, the uribistas will portray themselves as pro-peace and pro-dialogue with FARC, when in reality they will try to block any realistic agreement, and will extend the stalemate until the 2018 presidential election.
In sum, Colombians’ patience will have to withstand a new test: putting up with politicians playing unbearable games. Even more unbearably, FARC ex-commanders are learning to play those games, too. As the best liars in Colombian history, they are well prepared. So, if you expected to find any workable solutions to this Colombian political conundrum, we think you’ll be kept waiting and waiting.
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