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A Mid-Term Fiscal Framework (MTFF) distant from economic recovery

The solution of the current state can only be achieved by strengthening the infrastructure, human and technical resources of the hospital network. Eliminating the institutionality has lessened the health work market and the protection of healthcare workers to be at the frontline against the virus.
 

In the social area, it is necessary to strengthen protection toward the impoverished and vulnerable population, extending coverage of social programs such as the number of allocations, as confinement has lessened the already precarious income of these conglomerates, thus homes cannot take it anymore, and need to look for their daily income. This is where the contagion curve has not been able to get stabilized.
 

Listen: “The government doesn’t have many mechanisms to alleviate unemployment (in Spanish).”
 

Confinement and deterioration of quality of life in homes has been unequal in different economic sectors. According to the National Administrative Department of Statistics (DANE, for its Spanish acronym) figures, in May of 2020, during the March-May period, 3,255,000 jobs were lost, as compared to the first three months of the year, and 3,952,000 compared to the same trimester of 2019 (figure 1). One of the priorities of the socio-economic recovery plan should be implementing an emergency basic income program –both for the unemployed as for informal workers– during the pandemic.
 

The indicator that reveals the contribution to development takes into account both participation as percentage growth. The sectors that most contributed to employment loss with  85% of all sectors were:
 

  • Vehicle trade and repair
  • Artistic activities, entertainment, recreation, and other services
  • Manufacturing industry
  • Agriculture, husbandry, hunting, silviculture, and fishing
  • Construction
  • Hospitality and food service

This reality compels different political and social actors, especially those in charge of designing political policies, to deepen and direct the discussion process taking into account the changes in behavior provided by the virus and the lockdown.
 

The figures show that the sectors most impacted are where personal interaction is greater or labor-intensive. Furthermore, many of them are the ones that contribute most to economic growth. For instance, during the 1975-2019 period, the trade sector contributed 20% to national growth, as well as public administration with the provision of public assets such as education, healthcare, defense, and justice.
 

On the other hand, the manufacturing industry and agriculture have also contributed to this growth, as despite losing 10 and 4 percentage points (pp) respectively in the same abovementioned period. Meanwhile, the financial sector gained participation in the economy (close to 4 pp) and contributed to growth by 9%.
 

Read more: What is basic income and how can it be implemented in Colombia? (in Spanish).
 

This situation, besides the changes in production and consumption that will take place after the pandemic, will compel the government, along with the productive sector, to plan intervention processes, where, if possible, everybody should win. For this, the government must reorganize tributary benefits, tax burdens, and public expenses. Also, it should “reestablish the capability to design, implement, and apply the conditionality of the receptors, so the private sector can operate in the best way possible for inclusive growth and sustenance” 1.


These proposals, on which there should be a consensus, seem to fall short of the latest Mid-Term Fiscal Framework (MTFF) implemented by the government and that lacks proposals that include substantial changes in taxation and public investment expense, favoring economic recovery.


Although the MTFF acknowledges “the uncertainness of the future”, it preserves the budgetary expense and taxing inertia, not only on the short but also in the mid and long-term. It also highlights the efforts for increasing liquidity of the financial system, ignoring that this money injection is not reaching the companies with greater need of cash–especially small and medium enterprises– and much less to the workers, and impoverished and vulnerable families.


So far this year, budget expenditure has had substantial changes in additions that are not reflected in execution levels. The already approved General National Budget (GNB) passed from Col $271,7B to Col $300,7B, but the execution level is precarious taking into account the current economic situation and the social needs of the people.

Therefore, estimations of monetary poverty are esteemed at between 40 and 45% of the people, so immediate and sustained intervention of the government is necessary, something not seen in the MTFF.
 

Within this context, as also expressed by different sectors of society, the government needs to “eliminate the exemptions, deductions, and discount in the legal system, because:
 

  • “Make the tax structure complex and increases costs” to comply with the obligations as well as managing collection, “producing unjustified efforts for every actor, increasing the distortionary character of the tributary scheme and incentivizing evasion”
  • “Exemptions, deductions, and discounts” erode the taxable base, “boosting increasing marginal fees, hence discouraging investment”
  • The “possibility of creating preferential treatments in the national tax system encourages corruption, making interested parties to offer bribes to legislators in exchange for tax benefits”, and
  • “This scheme of exemptions, deductions, and discounts goes against the principle of horizontal equality established by the Colombian Constitution” besides impacting tax collection 2.

Additionally, natural persons file their taxes so they can contribute progressively to budgetary financing and so the government may transfer the funds necessary to the most impoverished municipalities, to complement their income. According to a DANE Income and Expense Survey of 2018, 31% of the 14,350,000 Colombian households receive less than one legal monthly minimum wage (LMMW); 30% between 1 and 2 LMMW; 16% between 2 and 3 LMMW; and the remaining 23% over 3 LMMW.
 

The continuation of regressive fiscal policies of the MTFF formalizes an unprecedented escalation of the public debt. In the 2020 budget of Col $270B to implement, the account for debt payment is Col $59,3B of which close to 30B (3% of the GDP) are for paying interests.
 

Read more: In the face of the emergencies, where has the government failed? (in Spanish).
 

Despite this budgetary reality, the government has used external indebtedness as its main source of external funding in the face of the collapse of direct foreign investment as a result of the paralysis of the international economy caused by the pandemic.
 

The communiqué formalized by the MTFF 3 says the amount of public indebtedness will increase for the end of this year to Col $100B, increasing the public debt from 50 to 60% of the GDP and the fiscal deficit to 8.2 % of the GDP.
 

This debt should be paid with severe payment plans, therefore the government has already said it will pass a new tax reform bill in 2021 for an amount equivalent to 2% of the GDP and formalized it by issuing one of the economic emergency decrees selling ISA and Ecopetrol stocks.
 

The debate on the economic and social consequences of the excessive indebtedness amounts that will come will be without a doubt one of the main discussion points of the Colombian political agenda, as is occurring in other countries in Latin America.

 


1 https://www.project-syndicate.org/commentary/conditional-bailouts-of-private-companies-2020-crisis-by-mariana-mazzucato-and-antonio-andreoni-2020-06

2 Informe Nacional de Competitividad 2010-2011. Ruta a la prosperidad colectiva. Consejo Privado de Competitividad. compite.com.co/wp-content/uploads/2017/05/2010INC.pdf. Pág. 134

3 El comunicado anota al respecto que: “Como producto de la recesión, los flujos de IED disminuirán en el presente año (-38,5 %). En el financiamiento externo, la caída de estos ingresos sería compensada por el aumento en el endeudamiento externo del sector público para hacer frente a la crisis”. ,https://www.minhacienda.gov.co/webcenter/ShowProperty?nodeId=%2FConexionContent%2FWCC_CLUSTER-135525%2F%2FidcPrimaryFile&revision=latestreleased

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