20180925-法国巴黎银行-Colombia__Mind_the_fiscal_gap_9页_442kb

Summary of "Colombia: Mind the fiscal gap"

Core Content

The document provides an analysis of Colombia's fiscal situation in 2019, focusing on the implications of recent budget bill changes, the outlook for fiscal targets, and the prospects for tax and pensions reform. It is authored by Luiz Eduardo Peixoto from the Latam Economic Research team at Banco BNP Paribas Brasil SA.

Main Points

Budget Bill Adjustments

• Congress has approved a 1.2% of GDP increase in expenditure in the 2019 budget bill.
• The increase in current expenditure and investment is expected to bring spending closer to 2018 levels.
• This increase will be offset by a reduction in the federal government's interest bill, maintaining overall fiscal balance.

Fiscal Targets and Rating Outlook

• Colombia is expected to meet its 2018-2019 fiscal targets, which is crucial to avoid a potential rating downgrade.
• Despite the adjustments, the government may still need to announce budget cuts in 2019 due to possible shortfalls in tax revenue from economic growth.

Tax Reform Prospects

• Structural tax reform has become more challenging, as coalition partners have rejected key proposals, including reducing the minimum income tax threshold and replacing VAT deductions with a reimbursement scheme.
• The Radical Change and Liberal parties have withdrawn from the coalition, complicating the reform process.

Government's Strategy

• The government is now promoting tax reform as a means to fund increased spending.
• The Funding Law bill is expected to be submitted to Congress within two weeks.
• The reform is likely to include:
  • A marginal reduction in corporate income tax (to 32%).
  • Measures to broaden the tax base, targeting an increase in the taxable income base from 2.6 million to 4-5 million people.
  • A 37% tax rate for those earning more than 38 times the minimum wage.
  • Efforts to tackle tax evasion and close loopholes, aiming for a 10% annual reduction in evasion.

Impact of Tax Reform

• The fiscal impact of the proposed reforms is expected to be:
  • +1.4% of GDP from reducing VAT deductions.
  • -0.4% of GDP from lowering the corporate tax rate.
  • +0.4% of GDP from broadening the tax base.
  • +0.2% of GDP in the first year from reducing evasion.
• The financial transactions tax is likely to be dropped due to its difficulty in approval.
• Capital repatriation with tax discounts is expected to have a fiscal impact of 0.2-0.5% of GDP.

Pensions Reform

• Pensions reform is seen as a positive sign for fiscal sustainability.
• The system currently has low coverage (around 25%) and significant subsidies.
• Demographic changes will require reform to avoid serious imbalances.

Fiscal Position

• Colombia is expected to finish the year with a primary surplus of 0.5% of GDP, which will help reduce debt levels.
• However, the reliance on oil revenues remains a concern for credit rating agencies.

Key Information

• Tax loopholes and evasion reduce potential tax revenues by 30% to 40%, with VAT exemptions accounting for 6% of GDP.
• Rating agencies are closely monitoring both tax and pensions reform to assess long-term fiscal sustainability.
• Legal disclaimers emphasize that this is non-independent research and may involve conflicts of interest.
• The document is intended for professional clients and does not constitute investment advice or a prospectus.

Conclusion

The 2019 budget adjustments reflect a more realistic fiscal scenario, but without structural tax reform, long-term sustainability remains uncertain. The government's shift in promoting tax reform as a funding mechanism is a strategic move, though the likelihood of broad reform is low due to political resistance. Pensions reform is also critical for long-term fiscal health, and the primary surplus for 2019 is seen as a positive indicator. Overall, Colombia is expected to maintain its investment-grade rating for now, but continued reform efforts are essential to address fiscal challenges.