The first definition provided by the dictionary of the Royal Academy on the word ‘rule’ Its the “rigid, rectangular-shaped instrument used to draw straight lines, or to measure the distance between two points”. Next, the governing body of the Spanish language also describes the term as “that which must be fulfilled because it is agreed upon in a community”.
According to the institution, there are at least a dozen additional meanings of those same five letters. And the number is even greater when mathematical expressions are included. such as “rule of three” or those that have to do with social or sporting order, which is the case of “rule of the game”.
(See: The countries that work the most and least in the world: at what extreme is Colombia?).
Perhaps that is why it was easy for some technician to coin the principle of “fiscal rule” at the time, as a way to synthesize the commitments that an economy makes with respect to the management of its public accounts. If four decades ago only a handful of countries had voluntarily adopted this kind of straitjacket to show seriousness in their affairs, Today the number rises to more than a hundred, according to the International Monetary Fund.
Colombia was not immune to this trend. In 2011, Law 1473 was passed, which identified the mechanisms to determine a series of values related to the weight of the debt or the maximum deficit of state finances in a given year, as well as its future path.
Temporary exit clauses were also provided for, which were put into practice on more than one occasion in the event of exceptional circumstances. Part of the original precepts ended up being renewed in a 2021 law – 2155 – that addressed that and other issues when the pandemic was beginning to be left behind.
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Clean slate?
However, nothing of what happened compares with the announcement made by the Ministry of Finance during the week that ends, in the sense of going to Congress soon with a project aimed at making the fiscal rule more flexible. For the head of the portfolio, Ricardo Bonilla, the current room for maneuver must be expanded given the low pace of economic growth, Otherwise we would have to take out the scissors to cut programs and investments here and there.
(See: What the proposed threshold of four minimum wages implies for the pension system).
Under the official’s logic, greater flexibility in the current parameters would allow the Petro administration to more decisively advance a policy in favor of productive reactivation. In such a way, andl Government spending would be combined with other stimuli in order to boost a series of sectors such as tourism.
The problem is that the new position breaks with what has been stated since the beginning of the administration. Not to go too far, when participating in an event to attract investors that took place in London during the third week of April, Bonilla stated that “we are committed to the fiscal rule and to reducing the size of the debt.”
Now, apparently, there is another way of seeing things, something influenced by an even more demanding panorama and a political climate of greater polarization, as became clear after the speech given by Gustavo Petro on May 1, when the president redoubled its commitment in favor of the transformations it promotes.
A detailed look at the figures shows that a series of problems that appeared a few months ago have become more acute. Due to this, everything indicates that the borders delimited by the fiscal rule for 2024 will be surpassed unless a series of significant cuts are made in the budget items approved for this year.
Since tightening the belt does not sit well with the current tenant of the Casa de Nariño, the proposed solution is equivalent to opening additional holes in the belt. The risk is that instead of going on a diet so that the clothes stop fitting, the treasury will tear the seams and the country will be exposed.
Put very schematically, this is a particularly challenging crossroads. What is at stake is nothing less than the sustainability of public finances, along with the credibility built over decades, born from the ability that Colombia has shown to overcome crises coming from outside or internal shocks without major trauma.
(See: Colombia, among the countries that allocate more of their public spending to pensions).
What it is ultimately about is preserving the prestige that the country is “good paying” and meets its commitments on time. It is not just about promises, but about what the numbers show, which are what are used to make the diagnosis in a timely manner and prescribe the indicated treatment.
Ignoring remedies is equivalent to playing with flames. Latin America is full of examples that show what happens when corrective measures are not adopted appropriately. Apart from the fact that shocks bring devaluations, inflation, slowdown and poverty, surgeries become much more painful if the problems, instead of being fixed, are left for later.
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The numbers are eloquent. In February, analysts were surprised when the Ministry of Finance released the 2024 financial plan in which not only the way in which the government figures were closed last year were put in black and white, but the projections regarding the current one.
(See: Price of the dollar: downward trend continues, but it is revalued compared to January).
At first glance the news was good, since in 2023 the fiscal deficit ended up being lower than expected, as well as the balance of public debt. As a proportion of gross domestic product (GDP), the figures were 4.3 percent and 53.1 percent, respectively. It seemed that a path of reductions in both indicators was maintained after the expenses that had to be assumed when the health emergency associated with covid-19 took place.
Likewise, observers applauded the effort to reduce the red balance of the Fuel Price Stabilization Fund, due to the readjustments in the price of regular gasoline. Although the increase in the ACPM was pending, the shortfall fell by almost 16 trillion pesos to 20.5 trillion, compared to what was recorded in 2022.
However, A closer look showed that last year state revenues did not perform as expected and that a significant portion of the savings was related to a lower exchange rate, which made dollar-denominated obligations less onerous. That the dollar has weakened had to do with the global environment, which determined a certain strengthening of the currencies of emerging nations.
Furthermore, for this year the forecasts ended up being darker. From the outset, the deficit target was raised to the equivalent of 5.3 percent of GDP and the debt target to 57 percent. As someone said on that occasion: “we took one step forward and then took five steps back.”
Within the calculations they presented, the authorities spoke of lower expected collections of 32 billion pesos and expenses that would be reduced by 16 billion, which explains the largest shortfall. Even so, it was argued that the gap was authorized by the fiscal rule that allows certain flexibility depending on the behavior of some factors in the equation.
But even then the forecasts were inflated. Against the objections of the technicians, the Ministry continued to insist that it would receive ten billion pesos as a result of the arbitration of disputes between Dian and the taxpayers. Added to this was the promise that the fight against evasion would give much better results.
As a consequence, more than one spoke of additional cuts to meet the established deficit. Fedesarrollo, to cite a specific case, proposed an adjustment of 15.8 billion pesos, equivalent to 0.9 percent of GDP.
None of that happened and things look worse now. As reported, the tax collection corresponding to the first quarter amounted to 67.2 billion pesos, lower than the 71.9 billion expected. Items such as VAT or taxes tied to foreign trade are going badly, which is the expression of an economy that is advancing at a very slow pace.
This being the case, it seems impossible that if the hole in public finances continues in the same direction, it will reach 5.3 percent of GDP defined in February. Not only are incomes going badly, but the Government has not made a move to economize, a purpose that requires taking out the scissors very early.
(See: Colombia would have ‘modest growth’ in 2024, but would rebound in 2025, according to the OECD).
Munir Jalil, chief economist for the Andean countries at BTG Pactual, points out that “We could be talking about a deficit for this year that would be around the equivalent of 6 percent of GDP if no measures are taken”. Filling the gap would increase state debt in a similar proportion.
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Since adjusting to what was set three months ago would require a budget cut of a magnitude never seen before, of more than 30 billion pesos, it would have to be approved by the full Council of Ministers, the Ministry of Finance finds itself between a rock and a hard place. Waiting for the delay in budget execution to help amend the plan will not be enough, nor is it feasible for Gustavo Petro leans towards orthodoxy, just when the Historical Pact seeks to show more results.
Due to this, everything points towards a failure to comply with the fiscal rule, unless Congress decides to expand that margin substantially. It is not clear what would happen if he does not act and The Executive ignores what is a law of the Republic, although it is assumed that the control entities would take action on the matter.
Apart from that, what is truly important is the reaction of the markets, both internally and externally. For Munir Jalil, “Failure to comply with the fiscal rule generates, above all, a reputational blow and associated with this a potential increase in borrowing costs, without taking into account the consequences that it could have at the level of credit rating.”.
(See: Plan to reactivate the economy will be based on ‘bills that generate investment’).
Being forced to pay more is no small matter. For this year, the interest item will be equivalent to almost 26 percent of tax revenues, a proportion that will tend to rise if the balance of debts is greater and new hires are more expensive.
It is enough to look at that, in terms of risk margins, ours is triple that of Chile, double that of Peru and Mexico, and is above that of Brazil. Minimizing the probability of entering a vicious circle as much as possible would serve to reduce this gap and clear up the fiscal alarm situation in Colombia.
Because the challenge of keeping the house in order is not something that is limited only to 2024. Next year the prospects are much worse and that is not including what the health reform or the impact of giving a sum to older adults that is in the pension proposal.
And, clearly, the problem is not solved through speeches but through decisions. Even less pulling ideas out of the hat such as renegotiating the payments of what is owed to the Monetary Fund or not transferring to Ecopetrol what the company has put in to finance the deficit of the Fuel Fund. Regardless of the Government’s approach, its biases, intentions or theories, mathematics gives its verdict regardless of ideology.
Namely, that money is not enough today and that, as happens to any person who has financial difficulties, the only fundamental solution is to seek income or cut expenses. All The rest threatens the Colombian economy and the well-being of its inhabitants. That’s why rules are rules and were made to be followed.
RICARDO AVILA
Senior Analyst at EL TIEMPO
