Changes in the participation reform do not convince the Fiscal Rule Committee

This week, as a consequence of the debate and alerts that have arisen due to the reform of the General Participation System promoted by the National Government; Congress and President Petro’s delegates sat down to talk, reached agreements and introduced changes to the proposal, which were celebrated by the market, although it was made clear that they are not enough to put fiscal stability at risk.

As explained by the Ministry of the Interior and the speakers, the increase in transfers was basically reduced from 46% to 39.5% and the transition period was extended from 10 to 12 years. Likewise, the lock was strengthened so that said change cannot be implemented until a powers law is approved. which must be presented to the Legislature within a period of no more than six months.

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With this on the table, the debates in the Senate plenary session were strong and after this week’s approval, warnings remain due to the effects of the reform, which for analysts should not generate an increase of more than 35% in silver. that the central government turns to the regions. One of the most recent came from the Autonomous Committee on Fiscal Rules (Carf), which still seems not to be convinced by the issue.

In a recent statement, the tax authority highlighted that the the range of increase and that it be established that the growth path of SGP resources must be compatible with the Medium-Term Fiscal Framework; to ensure that the economy is not put at risk, especially in these times when less should be spent.

However, they stated that although these modifications are, at the margin, positive, they consider the initiative inconvenient because “transfers to finance sectors cannot be reduced in nominal terms from one year to the next,” in addition to insisting that “there is a stabilization mechanism for GSP transfers to the regions.”

“In summary, the CARF states that any modification of the SGP that increases the rigidity of transfers and imposes new obligations of spending to the National Government endangers compliance with the fiscal rule,” they explained.

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Avoid pressure

In its statement, the Committee also took several alerts that it had already mentioned in the report presented to Congress to remember that in the absence of additional measures, the Legislative Act that seeks to reform the SGP implies an increase in public debt to levels of no return ( above the limit of 71% of GDP) and a breach of the Fiscal Rule.

“This would compromise the Government’s ability to honor its obligations.even non-transferable ones. The current fiscal situation, without reform of the GSP, is already challenging. Complying with the Fiscal Rule in 2024 and 2025 requires achieving tax collection goals and, if they are not met, measures to cut public spending. Furthermore, 83% of spending is inflexible,” they stated.

Due to this, they explain that without the reform, these transfers will increase from 4.2% of GDP in 2024 to 5.7% of GDP in 2035, the highest historical level. This represents a fiscal effort greater than an average tax reform; while if the project is approved, they would increase up to 8.2% of GDP, generating what for them is an unsustainable increase.

“Offsetting this increase would imply additional revenues equivalent to three tax reforms. As a percentage of the Nation’s Current Income, the SGP is already expected to represent 30.8% in 2027, that is, 10.8pp more than what was observed in 2023. With this project, interest expense would increase by the equivalent to a tax reform average between 2027 and 2035, leaving room for public investment and social spending, they warned.

The Fiscal Rule Committee recognized that reducing the transfer as a percentage of the Nation’s Current Income by 10 percentage points and extending the transition horizon from 10 to 20 years or transferring powers by 1% of GDP, reduces fiscal pressures; but remember that the deficit and debt would continue to be higher than the base scenario, which is consistent with compliance with the rule.

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These experts criticized that the discussion of this reform began at the end, since the first thing that should have been reviewed, in its concept, is what are the powers that the National Government can transfer to the territorial entities, what is its execution capacity and what are the sectoral spending needs.

“Postponing this discussion prevents a holistic evaluation of the fiscal risks and the proposed reorganization of the State and maintains an uncertainty that is worrying in the face of country risk assessments by creditors and rating agencies,” they concluded.

Meanwhile, now it is the turn of the House of Representatives, which must say whether or not to give the green light to the project, although everything seems to indicate that after the agreement reached, there will be no major setbacks in the development of the debates that are needed and Everything will be ready for the presidential sanction and the debates that will come with the transfer of responsibilities.