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Colombia's Santos under pressure over tax vow
BOGOTA
Petroleumworld.com, Aug 31, 2010Colombian President Juan Manuel Santos could find himself in a fiscal straitjacket after vowing not to raise taxes to preserve growth, while simultaneously risking a deeper public deficit by boosting spending.
Santos, a British and U.S.-trained economist who came to office this month, promised to leave taxes untouched because his government estimates economic growth of more than 6 percent will cover state spending.
But experts debate whether Santos has slammed the door on a vital option to finance government programs that stimulate development, especially as the Andean country plans reforms in health, infrastructure, education and justice.
"In any presidential campaign there are phrases that end up with unforeseen consequences," local analyst Mauricio Reina wrote in a newspaper column. "In the case of Santos, the tax promise has become a straitjacket in one of the key challenges of the government: public financing."
The government forecasts strong growth this year. But in the first seven months of 2010, tax revenue rose only 0.03 percent to $22 billion, compared with the same period a year earlier.
"I think the government has got itself into problems by promising not to raise taxes," said Camilo Perez, director of economic investigations at Banco de Bogota. "Most of the measures announced by the government are orientated toward more spending and less taxes."
Colombia, thanks to stronger domestic demand, is recovering from the global economic crisis. But demand from its major trading partners, the United States and Europe, remains sluggish, and a diplomatic dispute restricts trade with neighboring Venezuela.
The previous government said it expected next year to dismantle the economic stimulus that allowed Colombia to weather the global crisis with growth of 0.8 percent. It was one of the few countries in the region to register growth.
LOCOMOTIVES OF GROWTH
The government says its program will stimulate growth and generate more than 2 million jobs. Santos is pushing a "fiscal rule" to oblige the state to save money and cut debt during boom times and build reserves to weather economic slowdowns.
A few days after taking office, Finance Minister Juan Carlos Echeverry announced he would adjust the 2011 budget to redirect $1 billion to stimulate the "locomotives" of growth - housing, infrastructure, education and agriculture.
Those finances will be obtained through domestic debt swaps, which will reduce the state's obligations and free up more resources.
"Whatever happens, taxes will not be increased," the minister said recently. "That is what the campaign of President Santos promised, and that is the commitment of the government."
Santos expects to drive the Colombian economy to sustained growth of more than 6 percent. The central bank has forecast growth of 4.5 percent for this year.
While the central bank has backed the new government's plans, it has also warned that the fiscal deficit will rise to 4.4 percent of gross domestic product in 2011 from its initial projection of 3.9 percent of GDP for next year.
With one percentage point more of growth, the government would receive $300 million more in tax revenue. But even Echeverry says "the economy needs to grow more rapidly."
Tackling Colombia's stubborn fiscal deficit is one of the key challenges for the Santos government, especially as the country seeks to recover the investment grade rating it lost during a 1990s fiscal crisis.
Colombia urgently needs to overhaul a bankrupt health system, and some experts see a need to reform a distorted tax system. They also say the country should address restrictive laws requiring transfer of central government funds to local and regional authorities.
"We believe the government is going to work on unifying taxes and exemptions," said Jose Fernando Restrepo, director of investigations for the firm Interbolsa. "That will focus the debate more on the fact that the campaign promise is being fulfilled."
Story by Javier Mozzo from Reuters
Reuters 08/30/2010
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