State, to tighten your belt: what effects will the review of public spending have?

The day had been extensive and the attendees completed the third day of meeting at the Cartagena Convention Center. Even so, the auditorium was filled on Friday afternoon, when the Minister of Finance, Ricardo Bonilla, took the stage to refer to the topic that had monopolized the conversations in the hallways and the informal meetings: the situation of the finances of the Republic of Colombia.

(Read more: ‘The collection goal will not be met and that is why we adjust spending’: Minhacienda)

It was not be for lowerly. Over the past week, there have been reports showing a drop in central government income, whose situation had already been described as tight and now it went from brown to dark.

Faced with the possibility of a balance in the red much higher than the one that the authorities defined in February, the alerts went off. The most alarmist even spoke of possible difficulties in payment of state obligations and a possible increase in risk indicators or the exchange rate.

But this time the reaction was quick. As noted by the Minhacienda in its intervention, by Tuesday the details of a cut of 20 billion pesos in the 2024 budget, announced four months ago, should be defined, to which a similar amount would be added. Added to the above is the intention to increase the value of diesel gasoline for large fuel consumers.

Beyond the figures, the underlying message is that the Executive is willing to keep the house in order. In this way, Bonilla stressed that, if another snip becomes mandatory next semester, it will be so. The announcement, reluctantly endorsed by Gustavo Petro himself a few hours later at the same event, should serve to calm the exchange and debt markets.

(Read more: Everyone agrees: why cutting spending is a good option in the face of the fiscal crisis?)

While the additions and subtractions of a complex exercise that includes not touching the programs that the Casa de Nariño considers essential are being done, additional concerns arise about a problem that is more structural than conjunctural. Said in one sentence, The Colombian State turns more and more without the money reaching itwhich threatens to become unsustainable.

Old problems and new obligations combine to create a challenging and unconcealable reality. So much so that the current administration had no choice but to tighten its belt in order to avoid greater evils. The intention would also be confirmed with the publication this week of the Medium-Term Fiscal Frameworkwhich will show the scenario for the next ten years.

When Congress gave the green light to the current national budget in October 2023, today the first voices were heard that warned about the difficulty of complying with it. The reason was not only that it exceeded 500 billion pesosbut rather the calculations regarding income that were valued at 352 billion pesos, which was seen as very optimistic (the rest of the money comes from other sources, including debt contracts).

Five months later there was a tacit acceptance that this had been the case, when the financial plan released by the Ministry of Finance reduced the figure to 320 billion. The main factor in the decrease was a cut of more than 25 billion in expected tax collections.

Part of the decline was attributed to the effect of judicial decisions. On the one hand, the Constitutional Court was against the rule that was incorporated in the 2022 tax reform regarding the deductibility of royalties from income tax that companies in the extractive sector pay. On the other hand, the Council of State issued a ruling on favorable balances that taxpayers could demand from Dian, which translates into smaller collections. Additionally, the behavior of the exchange rate or the expected weakness in the economy made it justifiable to expect fewer resources.

Despite the correction, some doubts persisted at that time. For example, the Technical Directorate of Autonomous Committee of the Fiscal Rule He expressed his concern because ten billion pesos continued to be incorporated as income referring to the possible resolution of disputes that the tax administration has with taxpayers in arrears, without the legal mechanism to do so.

(See: Minhacienda announces cut of $20 billion from the General Budget)

As the months went by, it began to be seen that the pessimists were right. Without a doubt, the hardest blow is the drop in tax collection, which at the end of May showed a decline of 6.5 percent compared to the previous year. This contraction, as recognized by Minister Bonilla, is about twice greater than that observed in the same period of 2020, when the closures due to the pandemic began to cause havoc.

In concrete numbers, the treasury received just over 108 billion pesos in the first five months of the year, 15 billion less than the goal established by Dian for this exercise. The most notable drop – 41 percent compared to what was projected – was seen in the income chapter, although the gap is also large in VAT or withholding at source.

If we add to the above that the option of litigation is practically closed, it is easy to conclude that the loss of income will be very significant. For the Economic Research area of ​​Banco de Bogotá “Compared to what was approved in the General Budget of the Nation, the Government’s shortfall would end the year at around 60 billion pesos.”

As happens to any person whose income aims to be lower, the logical solution is to adjust. Otherwise, The government deficit would be much higher than establishedwhich would violate the fiscal rule that sets a limit on that balance in the red.

Colombian money

iStock

There will be no shortage of people who will say that failing to comply with this rule is an option. But the approach ignores that The gross debt of the central government amounts to 908 billion pesos and that it must make additional contracts to pay the obligations that fall due and thus finance its shortfall.

Since the intention is that the cost of obtaining new credit does not skyrocket, a manageable risk profile must be maintained. Because of this, ultimately the cheapest way out is to accommodate the restrictions and take out the scissors. This explains the 40 billion that would have been committed the Minister of Finance (20 in February and 20 now), although other analysts say that it should be at least 48 billion.

Whether the figure is one or the other, this task is difficult, since the room for maneuver is narrow. Both the service of the public debt and the payment of payroll or pensions are untouchable, so the greatest impact is assumed by some operating expenses and investment, which in Its original version was going to be close to 100 billion pesos.

As if that were not enough, taking resources away from the different portfolios and entities causes immense tensions in the ministerial cabinet. This in addition to commitments that arise, such as the one announced regarding assuming part of the tariff option that was born in the pandemic, in order to lower energy rates, which is worth 2.7 billion pesos that were not contemplated.

While this immediate problem is solved, another even more difficult one remains pending. Former minister Mauricio Cárdenas sums it up with one sentence: “We are setting up a state for which we do not have the money.”

The data speaks for itself. According to calculations made by Fedesarrollo, between 2000 and 2019 The total expenditure of the National Government represented on average the equivalent of 18.2 percent of the gross domestic product (GDP), with minor oscillations.

However, this proportion changed substantially when Covid-19 appeared and it was necessary to face the health emergency, while programs were launched to mitigate the impact of paralysis on the most vulnerable populations. Thus, public expenditures rose by the equivalent of 4.5 percentage points of GDP to around 23 percent.

It is worth noting that something similar happened in much of the world. The vast majority of countries took on more debt to face the pandemic, with the idea that an extraordinary effort of a temporary nature had to be made. Once the crisis was over and with the return to normality, state transfers began to be reduced.

(Read more: These are the first measures with which Minhacienda faces its cash crisis)

Colombia, on the other hand, behaved differently. So much so that according to the 2024 budget, central sector expenses were proposed that would reach 426 billion pesos, that is, more than 25 percent of GDP. After the first adjustment in February, The figure dropped to 24.4 percent, which is still a historical high.

It is true that in the course of the past five years there have been two tax reforms, but even though the treasury receives more, the accounts do not add up. In the meantime, in the opinion of Luis Fernando Mejía, the director of Fedesarrollo, “We are the country with the slowest spending adjustment among our peers in the Latin American region.”

Among the reasons that explain what happened are the greater social transfers, as well as the pension and health component. Apart from the above, the jump in debt levels This means that a quarter of tax revenues must go to interest payments alone.

The deficit of the Fuel Price Stabilization Fund deserves special mention, which exceeded 36 billion pesos annually and for this year would be around 12 billion. Such a burden is enormous, which is why the responsible thing to do is to raise the ACPM despite the complaints of the transporters.

(See: With partial blockade, the National Government started a spending freeze)

If we add to the above the inflexibility that exists in state obligations, this means that the failures that today force the Petro administration to take out the scalpel will continue to be a constant in the future. Without going too far, The 2025 budget exercise will be a huge headache and even more so if the economy does not improve its pace.

To make matters worse, there are more dangers on the horizon. The pension reform that Congress is about to approve will cost at least 8 billion additional pesos annually almost immediately, apart from the fact that it skyrockets state liabilities and would bankrupt the treasury within a few decades.

Apart from the above, the de facto nationalization of health is an enormous risk because the controls that existed are being dismantled through the back door. In a country where in practice there are no limits In terms of health care, there may be a kind of bottomless barrel of billion-dollar contingencies here.

On paper it can be argued that the way out is to increase taxes. And while it is true that there is a way to go on this issue, political reality makes it impossible for the middle class to assume more burdens or for VAT coverage to be expanded, as demonstrated by the social outbreak of 2021.

This being the case, no solution will be lasting until the issue of spending is addressed, which, even with cuts, continues to skyrocket, without there being many achievements to show. In this regard, Mauricio Cárdenas notes that “We have always had a structural problem, but the difference is that now it tends to get bigger and become unmanageable.”

Overcoming this situation would require not only great professional and technical management, but political leadership to pass reforms such as moderating the transfers made to the regions. Building agreements is imperative in an issue in which the well-known “everyone contributes” will have to be applied to save public finances.

As long as that does not happen, Colombia will continue “jumping thugs.” Because the crisis that broke out this week – which is not the first, although it is the most serious in recent years – will certainly not be the last if the country does not get used to living with what it has.

(See: Wake-up call: ‘We are withering our economy’)

RICARDO AVILA
Analyst
In X: @ravilapinto