The disaster of tax reform in Colombia – 05/07/2021 – Latinoamérica21

After five days of mostly peaceful protests – albeit with some outbreaks of violence – and after receiving rejection from most political parties, the government withdrew the tax reform bill it had submitted to Congress two weeks earlier. In exchange for not withdrawing it, the government offered to negotiate virtually all points of the project with the various opposition groups, but did not gain sufficient support. The withdrawal of the bill means that the government will not be able to introduce another until the next legislature, which begins on July 20. The political cost includes the sacking of the Minister of Finance, Alberto Carrasquilla.

In doing so, the government wastes time, but at the same time gives it the opportunity to move forward with broader negotiations under the leadership of a new minister. However, many political groups have already indicated that they will not support any laws because they believe it is not the right time to raise taxes on the population amid the Covid-19 pandemic.

What happened in Colombia this week sets the tone for other Latin American countries and illustrates very clearly the serious dilemmas that governments will face in the near future. The pandemic has resulted in a huge drop in government revenues and huge increases in spending to offset the effects of economic disruptions and other social support policies implemented. The fundamental problem is how to finance a growing budget deficit generated by Covid-19 amid very difficult social and political conditions.

Some countries are better prepared to meet this challenge than others. Colombia is perhaps among the least prepared because, although in the last decade, it has had acceptable growth rates (higher than Chile, Brazil and Mexico and only lower than Peru among the main countries), its double deficit (budget and current)) are among the highest on the continent.

These problems, along with expectations in international markets that the tax reform presented by the government would struggle, may explain the fact that Colombian bonds are already traded in international markets at a higher cost than some of the above. – saying “junk bonds”. (according to Bloomberg on April 29, 2021), despite the fact that so far Colombia has a BBB- rating by international rating agencies. Maybe the country will lose this ranking soon.

The main lines of the bill that the government withdrew were to increase taxes and broaden the base of the sales tax (in Colombia this is called value added tax) [IVA]) and increase your rates. The highest rate should be 19% (one of the highest by international standards). In addition, an increase in the income tax base and the elimination of certain rebates have been proposed. In total, the proposal could have represented additional revenue equivalent to 3.9 percentage points of GDP (about 23.4 trillion pesos or about $ 6.5 billion at the current exchange rate), of which 61% would have been paid. by individuals, depending on outgoing funding. minister.

The project also took into account important aspects of social spending. He proposed to perpetuate Solidary Income (assistance to the most deprived who do not have access to other subsidy programs implemented temporarily during the pandemic) and to make it complementary to other subsidy programs. According to government estimates, this would increase the number of beneficiaries from 1 to 4.7 million people covered and significantly reduce poverty.

The government never sufficiently socialized the bill it submitted to Congress. Rumors have been published about certain aspects of its content, in particular the new taxes, which have generated a lot of dissatisfaction. Trade unions, such as the Association of Industrialists (Andi) and several renowned academics and knowledge centers have made alternative proposals which have clearly not been taken into account in the bill. Little was known about the problems associated with the new social programs that were to be implemented.

The conditions under which the bill was presented for consideration by Congress could not have been worse. In addition to not having good socialization and not knowing of interesting alternative proposals, the bill was introduced amid the strongest peak of Covid-19 infections (the third in Colombia), amid news closures and restrictions on economic activity. On April 27, the Dane (National Statistics Department) released new poverty measures for 2020, showing increases of 7 percentage points in the incidence of national poverty, which amounted to 3.5 million more poor people. than in 2019 and an increase of 5.5%. points in extreme poverty, which means that 7.5 million people in 2020 did not have the income to buy the necessary staple foods.

To supplement the bad news, on April 30 the unemployment results were released, showing a considerable increase from the year immediately preceding, although this is an improvement from the worst months of the pandemic. . All of this reinforced a social discontent that had existed since before the pandemic and resulted in protests that ended the government’s proposals.

Although the situation in Colombia has particular aspects that differentiate it from that of other countries, the fundamental problem that everyone will soon have to face is that of balanced budgets. Under current conditions in Latin America, it is unthinkable to do this by cutting spending, so there is still an increase in taxes. Colombia shows the serious difficulties this entails and also serves as an example of how to do things right and at the right time.

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