Who is afraid of Gustavo Petro?
The national government deficit for 2020, estimated at 8.2% of GDP in June, was by November rising toward 8.9%, and the estimated deficit for 2021 had been massively revised upward, to 7.6%, from 5.1% of GDP in June. Given that the government’s GDP growth forecasts were also revised downward, from -5.5% to -6.8% in 2020, and from 6.6% to 5% in 2021, tax revenues are likely to underperform MinFin projections. Surely spending will end up above Medium Term Fiscal Framework estimates in both years.
These numbers have two direct implications. First, more financing will be required. Gross public debt should end 2020 at 66.5%. At the end of the next administration, in 2026, the current deficit path would take debt near to 52% of GDP. Second, the potential adjustment between 2021 and 2022, which under the current scenario implies cutting the NCG deficit from 7.6% of GDP to 2.5%, is a Herculean task, to say the least. A tax reform yielding 2% of GDP in 2022 would be all but impossible, but a more modest one, of say 1% of GDP, is necessary. We think Colombia has enough “reputation credits” to keep rating agency investment grades in place.
Income tax collection is doing better than expected, while domestic VAT is doing much worse. since it is closely related to economic activity. Though the director of DIAN claims he is on track to meet the tax collection goals set in June, the worsening of the economic downturn suggests gross revenues will underperform those targets.
2022 could be the year of reckoning in Colombian politics. Many people think that if Gustavo Petro is elected president, 2020-2021 could be remembered as the last years of happiness, as hard and unwelcome as they now seem. Is that so? Is Petro really Beelzebub? We review his track record. The main ideas he’s raised relate to employment programs, creating a public development bank, raising the minimum wage, taxing the rich, basically nationalizing the healthcare and pension systems, banning fracking and favoring small peasants in land redistribution, lowering VAT and raising income taxes, and with lots of (hidden) expenditure. It seems an agenda from the 1960s, aiming at an economy based on public-sector-owned banking, agricultural smallholdings and wide and free provision of social services and goods. It’s inspired by mistrust of big corporations, shared by progressives around the world, and widely popular nowadays among millennials. But the most striking if unwritten feature of Petro’s agenda is to undermine the underpinnings of private property vis-à-vis public ownership; mistrust of market mechanisms and confidence in state dirigisme; creation of an array of money-losing public institutions with a likely large impact in long term fiscal sustainability; and advancing an undercurrent of historical resentment by the have-nots against the haves.
During Petro’s tenure as mayor of Bogotá some good things were achieved. Yet many outlandish goals faced a harsh reality check. His dysfunctional team saw frequent defections. It can hardly be said that Bogotá was better after his tenure. Many people are afraid of Gustavo Petro. We conclude that they should be. Not because he’s Beelzebub -- but because he could do a lot of damage, sitting at the presidential desk.
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