A Fiscal-Periscope Analysis: The Case of Colombia

Abstract

This document provides a fiscal-periscope analysis of Colombia, meaning a 360-view of the backward-looking obligations (clearing sectorial arrears), present obligations (debt burden), and forward-looking obligations (contingent and those resulting from covid-pandemic). We make a recollection of the fiscal rule performance (instituted in 2014), including the use of “escaping clauses”, and assess the medium term outlook. The conclusion is that Colombia needs urgently a new tax-reform aiming at increasing tax collection in no less than 2% of GPD. Under this scenario, the ratio Gross Debt of Central Government/GDP could be stabilized at 65%-70%, increasing the probability of Colombia maintaining her investment grade status. The bulk of the expected tax gains would come from extending the 19% VAT and reversing tax-brakes granted recently to firms. Some adjustments could also be done on households taxes of medium-high strata, although they were recently increased in a significant manner, including the wealth-tax. Under a more ambitions tax-raising scenario of up to 3.7% of GDP, Colombia could substitute firm’s non-wage costs, but this would entail a budgetary effort of 1.3% of GDP.The institutional settings of the fiscal rule and the medium-term projections ordered by laws have served well Colombia. However, we recommend to re-focus the fiscal rule to aim at not surpassing certain threshold of the central government gross debt/GDP ratio and instrumenting it through a primary surplus target. The strategy is to replicate at the fiscal level the successful “inflation-targeting” used by monetary authorities in Colombia.