Fury took over the streets when the government of Iván Duque proposed a tax reform to finance the fiscal coffers after the economic impact of the pandemic. That reform, harshly criticized by opponents and supporters of the government, achieved neither the political nor the popular support it sought and ended up triggering a gigantic social outburst.
Under the pressure of the protests, the executive was forced to bury a reform that affected the middle class and raised taxes on some basic necessities. So far, the protests have lasted 21 days and do not seem to be about to end. In this context, the country will seek to advance in creating a new tax reform that will increase tax collection after a year of the pandemic in which income fell, and expenses soared.
With the Pandemic, Debt Soared
Although there is no consensus on what a new reform should look like, what most social, political, and business actors do agree on is that the country needs to “urgently” increase its tax revenues after a historic economic contraction of 6.8% of the Gross Domestic Product (GDP) in 2020. As fiscal spending increased to respond to the emergency and revenues flowing into the fiscal coffers did not increase, the country increased its debt level from 52% to 65% of GDP. And the budgetary deficit climbed from 2.5% to 7.8% of GDP. For Colombia, that level of deficit and that level of debt is very high.
Duque’s reform sought to raise about 2% of GDP. However, the government had to lower its expectations and open itself to the possibility of raising resources equivalent to 1.4% of GDP. The new Minister of Finance has given signals that this time the idea of extending taxes to a broader group of the population would not be on the table. Taxes on the middle class could be left out of the new proposal. “There is no need to raise taxes on the middle class. That was a serious mistake,” says economist Juan Carlos Echeverry.
A Pressure Cooker
The effects of the recession added to the discontent over the inequality that historically affected Colombia contributed to the latent possibilities of an explosion. According to Salomón Kalmanovitz, professor of economics at Jorge Tadeo Lozano University, the country needs a new tax reform but a “less aggressive” reform.
The current challenge is that social demands have escalated far beyond the discussion on what taxes to raise. The list of demands presented by the representatives of the National Strike Committee calls for the following conditions:
- The withdrawal of a health reform bill
- A basic income of at least one minimum wage per month
- Subsidies to small businesses
- Free educational tuition
- An end to privatizations
- Defense of national production
- Among others
In addition to these, the protesters have also generated viable proposals that include:
- Financing the petitions with loans to Banco de La Republica.
- Making use of international reserves
- Renegotiate the foreign debt
- Eliminate tax exemptions for large companies and individual capital.
- Eliminate resources to control tax evasion, tax havens, and corruption.
With this new scenario, if the government had a financing problem before presenting the tax reform, now it has a much bigger one with the pressure of strikes, blockades, and street protests. The agreement in the current talks on a future reform is that it should be less ambitious and more focused on changing the preferential treatments given to companies.
A generalized dissatisfaction with the current tax system is added to the problem of fiscal sustainability. These two factors made the tax reform very important, but it is more difficult to reach an agreement with the current mobilizations.
However, if no reform is made, the risk is that the debt will be more expensive. There will be a possible depreciation of the peso. It will not be possible to finance some of the social programs that emerged to mitigate some of the effects of the pandemic. For example, the increase in poverty to 42.5% and extreme poverty to 15.1% in 2020, according to the National Administrative Department of Statistics, DANE.
The Political Risk of Tax Adjustments
The protests triggered by the tax reform in Colombia may mark the beginning of new demonstrations in other Latin American nations. The rationale behind this hypothesis is that the social outburst that began in late 2019 in several countries in the region was only paused due to the pandemic.
Therefore, when governments start making fiscal adjustments, people will return to the streets. The underlying problem is that fiscal stimulus packages will not last forever, but the hunger and misery unleashed by the pandemic will not disappear overnight.
Most of the fiscal stimulus was debt-financed. And debts, sooner or later, have to be repaid. That is why one of the challenges facing the region’s economies will be to solve the problem of fiscal financing.
