The stability of public finances, in a scenario in which public spending is increasing, is one of the pressures facing the Government.
In the most recent pronouncement of the Autonomous Committee of the Fiscal Rule (Carf), the agency warned of the risks of not complying with the Fiscal Rule Law from now on. Andrés Velasco, technical director of CARF, spoke with Portafolio about the country’s fiscal outlook and the challenges he sees for the government.
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How likely is it to breach the tax rule?
The pronouncement of risk of non-compliance is drawing attention to the years 2024 to 2026. In 2023 things are given for compliance with the rule in accordance with Law 2155 of 2021. There are risks, but they are manageable.
The fiscal rule has a doctrine in which permanent spending is projected only when there is permanent income. In the Medium-Term Fiscal Framework, the Government includes for 2024, 2025 and 2026 some very important amounts of litigation arbitration. There is a contingent for close to $30 billion and they want to implement a strategy to recover those resources, which would be $15 billion in 2024, $10 billion in 2025 and $5 billion in 2026.
These resources have the characteristic of not being structural, permanent or recurring. The CARF considers it risky to schedule structural spending with this, it would go against compliance with the fiscal rule. There is no structural income to replace them.
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Can there be a possible underfunding?
More than that, we would be facing fiscal pressures in the future. A clarification must be made, this is the first time, the years 2022 and 2023, for which the Colombian fiscal rule cannot be met with non-structural income, because it was precisely an important change that was made in 2021 and the not allow non-structural revenues to finance structural spending. Previous governments did not have that restriction.
And that change was not something capricious, it is that the previous standard, although it complied with the fiscal rule, did not prevent the debt from rising.
How do you see the government’s spending position?
Colombia lived with a level of spending close to 15% of GDP for a long time. With the pandemic, that spending rose, and after the pandemic an effort was made to raise additional resources, two tax reforms have been made to sustain a slightly higher level of spending.
In 2022 we had primary spending, without counting the Fuel Price Stabilization Fund (Fepc), of 16.1% of GDP. In 2023 that rises 1.5 points, to 17.6%, and what we at Carf mention is that we are taking spending to maximums.
In 2024 we will reach a maximum of 19.5%, and in 2025 there will be another maximum of 19.8% of GDP. More spending is being programmed, to the limit of what would be compliance with the fiscal rule, but it really is not to the limit, because more spending is being programmed, financed by these revenues that are non-structural and are also uncertain.
(Read more: Government reforms would cause additional expenses not contemplated)
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How do you see the fiscal impact of the reforms?
That is one of the concerns regarding spending, even though it is high, the Fiscal Framework does not explicitly consider that the reforms, and I am talking about health and pensions, are included within that ceiling. And it is very probable that the reforms imply an expense even additional to that which is being programmed, which is already quite high.
At CARF we have estimated that what is measurable in the health reform can permanently cost 0.4% of GDP and with respect to the pension reform, we estimate that from the outlays implied by the current articles, relations of close to 0, 3% of GDP agreed, then added we have at least a risk of 0.7% of GDP of additional spending that is not explicitly in the Medium-Term Fiscal Framework and that would be a structural expense.
What do you think of the management that has been given to the Fepc?
On this front, the CARF’s reaction in the pronouncement is to praise the Government’s attitude and responsibility towards the management of this deficit, because it is really gradually deactivating one of the biggest fiscal problems that the Nation has faced.
With the increases in gasoline prices that began in the last quarter of last year, the cause of the deficit went from $36 trillion in 2022 to close to $18 trillion in 2023. The cause of the deficit has already been halved, this policy of price adjustment is giving results, the CARF trusts that the Government will finish the task with gasoline towards the end of this year and start it with the ACPM.
Gasoline.
EFE
Faced with income, is another tax needed or what other measures can the Government take?
The CARF does not pronounce on these types of solutions. The Government and Congress have command and responsibility for fiscal policy, and they will decide how to adjust that primary balance, whether with lower spending or higher income.
The first control variable is the 2024 budget, a first version has to be presented towards the end of this month and it has to be discussed in the second semester.
The Carf pronouncement points to prudence in public spending, to ensure that it schedules current spending that is consistent with permanent income.
(Read more: The effects of the price of the dollar on the fiscal rule)
Faced with the subsidies that the Government has today for fuels, Velasco raised the need for a transition to another scheme. “We have to study it well. The CARF said in a statement last year that the government must undertake a transition policy in which the gaps are closed and what is caused by the deficit is paid, at least with a year behind. The Government has come very judicious with this recommendation. When that transition is over, and the gaps are closed, it will be necessary to sit down and analyze what the new scheme or the new methodology will be so that consumers can avoid the international volatility of fuel prices ”, he assured.
LAURA LUCIA BECERRA ELEJALDE
Portfolio Journalist
