Reference image.
Photo: Getty Images/iStockphoto – Getty Images
The Ministry of Finance announced this week that it will partially block some spending appropriations assigned to all entities that are financed with resources from the General Budget of the Nation. In simpler words: the resource tap is closed, temporarily (says the portfolio), and for appropriations that did not yet have the approval of the Treasury.
In a certain way, this move had already been carried out for some time, since the resources that were sent to some entities were being delayed, as confirmed by this newspaper. During the past weeks, the Minhacienda telephones became a kind of service line for dissatisfied customers, in which the main complaint recalls one of the most famous phrases from the movie Jerry Maguire: “Show me the money!”
The official announcement is confirmation of a scenario in which there are several tensions at play. In the story of Ricardo Bonilla, Minister of Finance, the measure became necessary due to the “evident” lack of collection and the decision of the Constitutional Court to “deny the non-deductibility of royalties.” This legal blow subtracts more than $6 billion from the State accounts, according to the Ministry’s own calculations.
To this we must add the resources that did not reach the State due to a DIAN litigation calculation that never materialized (about $10 billion) and that, from the outset, various voices warned that it was a very optimistic accounting exercise and perhaps daring According to some projections, if $3 billion comes this way, we have to celebrate, even if it is through tears.
And although the May collection figures in the DIAN show a rebound, the truth is that the money that had to come in through taxes is below $12 billion, only for the first quarter of this year, according to Anif calculations. According to projections from Corficolombiana Economic Research, this gap could comfortably reach $16 billion.
Bonilla himself stated (during his speech at the Asobancaria congress) that for May there is a lower collection income of $15 billion.
For Luis Fernando Mejía, director of Fedesarrollo, “these figures indicate that it will be very difficult for the Government to meet its tax collection goal. A spending cut is inevitable to guarantee compliance with the fiscal rule.”
How do we get here?
The first, and most obvious, is the impact of the Constitutional Court’s ruling on royalties from the mining-energy sector. Although the court agreed to hear the Government’s arguments again after its November 2023 decision, it made its ruling final at the end of May of this year.
As this newspaper reported at the time, the Court’s decision was based on the argument that the proposals of the Ministry of Finance did not prevent the law from being violated, since the high court considered that what was stipulated regarding royalties affected the principles of tax justice and equity of companies in that sector.
But, in addition to this legal setback, the current gap in the country’s accounts was widened by a kind of immobility on the issue of DIAN litigation. To recover the billions that had been budgeted, it was necessary to present a bill to Congress, something that has not happened to date.
In this kind of disconnection between projecting resources and going out to obtain them, the drop in DIAN collection actually also enters, something that has more than one person in the Ministry and in the tax administration itself very upset. “The DIAN had an increase in staff, with more resources, and the truth is that it did not do what it had to do: the entity fell short when it needed to shine,” said an official with knowledge of the subject, but who is not cited because he is not an official spokesperson on this issue.
In the midst of this panorama, as has been told several times, there is a broken relationship between Minister Bonilla himself and the now Minister of Commerce, Luis Carlos Reyes (who until a few days ago was the director of the DIAN). This, beyond being anecdotal, explains, for some, part of the path that has been followed to reach the current poor results: “They are two entities that must work hand in hand, not seeing how one shows more chest than the other in the face of the president,” commented a tax analyst.
What’s coming in Colombia’s fiscal outlook
This whole scenario seems worrying, to say the least. The deficit calculator at this point, if you are very kind, shows a number around $20 trillion (which implies that we would be talking, conservatively, about 1% of GDP). This billion-dollar figure was confirmed by Minister Bonilla in statements to the media this Friday.
But the most worrying thing about the matter is that, according to some analyses, this number could be close to doubling by the end of the year. Even a report from the Bank of Bogotá speaks of an adjustment of almost $50 billion so that the Government does not violate the fiscal rule.
What does it mean? Several things, none flattering or simple.
The first thing at this point is that, just taking into account the most conservative estimate of how big the gap is at this moment, some point out that the tax reform failed, since the initiative sought a collection of about $20 billion.
In other words, one of the main legislative achievements of the Government (and which included tax and fiscal innovations with a view to leveling the playing field) went a bit down the drain.
The next thing is that the size of the fiscal adjustment that the Government must make is capital (if it were not grammatically incorrect, and looked terrible, the word would have to be capitalized, by the way). And in this way we arrive at a series of obstacles and problems, both political and economic.
The first option that the Government has at hand is to cut from the General Budget of the Nation, specifically in sectors and lines where the execution of resources is not optimal; Some point out that one of the first chips to fall at this point would be the Ministry of Equality, for example.
Just this week, the Ministry of Finance published a report in which it ensures that, of the $503 billion that were included in the Budget for this year, almost 30% of these resources have already been executed in financing and investment. The ministry assured that this percentage is “similar to the average of the last five governments in their second year in office.”
According to the Minhacienda, the sectors with the highest budget execution so far are “Education (38.7%), Mines and Energy (34.6%), Science and Technology (26.1%), Health and Social Protection (25. 2%), Equality and Equity (24.8%) and Work (21.9%).”
But the problem is that, even under an intense squeeze of resources via low execution, the savings that can be made would not be enough to cover the gap that the Government faces. What this means is that cuts will have to be made to other programs, even if they are going well in terms of executing money and projects.
This is not a conversation that, it is anticipated, will be easy between the Ministry of Finance and President Petro, since basically what it implies is that the scale of his Government’s ambitions must be moderated by several billion pesos.
For example, Óliver Pardo, director of the Fiscal Observatory of the U. Javeriana, estimates that, in real terms, public investment will fall by more than 33% in 2025. “And it is likely that it will have to decrease even more due to the recent drop in collection and the ruling of the Constitutional Court on royalties.”
How much will this adjustment be made? What shape will the cut take? A good part of this conversation will be known through the Medium Term Fiscal Framework, which the Government must present promptly and which, according to analysts and sources from the Ministry of Finance itself, must carry a very clear message that the task of correcting the gap is is doing.
This document is usually key to understanding the vision and knowing the scope (the real one, not the rhetorical one) of the governments in power. But in this case it will be particularly important, since it must provide security and confidence to the market (even more so when the country does not recover the investment grade, which was lost in the Duque era, to be clear).
Here it must be taken into account that next week, Moody’s (the risk rating agency) will visit the country in order to evaluate its perspective on the national economy, which in the end ends up being reflected in the rating grade. It is worth clarifying that, of the three large firms in its field (the other two are Fitch and Standard & Poor’s) this is the only one that, barely, still maintains the country’s investment grade classification.
Although there seems to be a consensus on the size of this cut ($20 billion was a figure that Fedesarrollo already managed, for example), it has not yet been established in which sectors and programs these maneuvers would be carried out.
Are there more options other than tightening your belt? Of course, you can always go buy new pants. The problem here is that this option is anything but cheap and, in essence, is problematic on other levels.
In the market there are options to seek relief through debt. Some of the routes that most quickly come to mind are capitals in China or the Middle East. But, according to some preliminary estimates, these are credits that could arrive with an exchange rate between $5,000 or $6,000. If you take into account that the dollar is currently below $4,000, you can understand the size of the disaster that this debt could bring.
And, on the other hand, a problematic message would also be sent to the markets: the lack of money in the budget (which was created mainly by internal situations, not by a pandemic or the collapse of the oil market, for example) we solve by assuming more debt.
In addition to this, even if desired, new debt would not improve the entire scenario, since both the fiscal rule and the National Budget establish limits for the acquisition of resources in this way.
There is an episode of The Simpsons in which the inhabitants of Springfield end up digging a very deep hole in search of treasure. When it is clear that such a treasure does not exist, your solution to get out of the hole is to keep digging. The analogy may come in handy to talk about the hypothetical path of debt to solve the lack of resources.
So where are the national accounts going?
At this point there is a certain consensus on the need for fiscal adjustment and on the dangers of extra debt. For example, Marc Hofstetter, professor at the U. de los Andes and former member of the Fiscal Rule Advisory Committee, warns that increasing government spending is not a good idea. “This would pay back in greater financial market concerns and higher rates. “Public spending is at full steam and this with a very high fiscal deficit and considerable interest payments.”
For his part, for Pardo, “the delicate situation of public finances, which is aggravated by the slowdown and the drop in collections, makes one of two things necessary, not mutually exclusive: a spending cut and a tax reform.”
The possibility of a new tax has already been announced by the Government itself. And, at this point, more than a possibility it seems like a necessity for some.
In addition to the consequent legislative wear and tear (which is no small feat for this point in the party), making more adjustments to the tax statute could lead to a problem for the public in the midst of a time in which the word corruption is frequently invoked.
“It is very complicated, for example, to make cuts when citizen perception of the corruption of the Colombian State is very high. Likewise, it is very difficult to demand a greater contribution from people if they have the perception that they are going to be wasted.”
