The fiscal playing field for the Duque administration
As the Santos administration comes to an end, the Ministry of Finance submitted to Congress its last Medium-Term Fiscal Framework (MTFF) during the second week of June. President Iván Duque has announced fiscal policy will be on top of his four-year economic agenda, so we expect this MTFF to be modified relatively quickly. Nevertheless, it constitutes a well-documented list of the fiscal challenges lying ahead.
First, the adjustment of expenditures other than interest payments will reach a problematic minimum we think will be politically impossible to maintain. In 2017 the government used resources from the arbitration process with mobile operators (0.3% of GDP) to bring forward to 2017 pension payments that would have been made in 2018. Thus, current expenditure in 2017 was 0.3% of GDP higher than it normally would have been, and this year it would be 0.3% lower. In 2019, this effect should disappear, and current expenditure should revert to normal levels (around 14% of GDP) which implies investment should fall to an untenable 1.2% of GDP in 2019 and stay there for the next ten years, since the sum of current expenditure and investment should be 15.2% of GDP according to the MTFF. We think something around 1.8%-2% of GDP would be politically viable.
There are, however, ways out of this predicament, in order to have a public investment path that is politically digestible: 1) increasing revenues, 2) cutting down current expenditures (excluding interest payments), 3) relaxing the fiscal rule or 4) a combination of all of the above. However, evidence has shown that cutting down current expenditures is a difficult task, so the possibility would be to look for higher revenues. That is why we don’t see a clear avenue when president-elect Duque says taxes must be cut and compensated through tackling tax evasion.
One of the areas in which the outgoing administration, led by President Santos, has positive results to show is that of poverty reduction. Extreme poverty went from 12.3% in 2010 to 7.4% in 2017, which implies a fall of about 40% that is substantially higher than the one observed in the period 2002-2010. Also, total poverty decreased by almost 30%; this means that between 2002 and 2017 almost 4 million people came out from poverty. Most of the change is explained by economic growth, channeled through the labor market and higher incomes. Lastly, Multi-Dimensional Poverty decreased almost 50% during the period and the variables that contributed the most to this performance were those related to the labor market, education and public utilities. Although results are positive, there is still a huge gap between urban and rural areas in both Monetary Poverty and Multi-Dimensional Poverty. Furthermore, this gap has widened instead of shrinking in the case of total monetary poverty and has been persistent in the case of Multi-Dimensional poverty evidencing the resilience of the indicator in rural areas to public policy efforts.
So, in conclusion, for us, there are two very clear priorities for the next government when it comes to policies oriented to poverty reduction. First, it is crucial to keep promoting policies that favor the correct functioning of the labor market. Second, it is important to design and implement effective poverty-reduction policies for the rural sector.
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