Interview: Mauricio Cárdenas
What are the main aims of the recent structural tax reform, and what effect is raising value-added tax (VAT) to 19% expected to have?
MAURICIO CÁRDENAS: The structural tax reform constitutes a substantial effort to modernise the Colombian tax system. It is a complete revision of the country’s tax structure with a long-term perspective, and focuses on competitiveness and the effective control of tax evasion. Postponing the reform was not a feasible option, as the fall in oil prices reduced the government’s revenues by COP23trn ($6.9bn), equal to 2.7% of GDP.
This reform is also one of the main tools that we are using to strengthen our economy, create formal jobs and foster resilience to external shocks, such as the high volatility of oil prices. Although there could be some macroeconomic effects of raising VAT to 19%, the absence of this tax reform would have led to a recessionary and inflationary spiral. The country’s credit rating would have been downgraded, investment would have fallen and the higher cost of debt would have served to crowd out public investment. Depreciation would also have reappeared, leading to inflation and further external adjustment.
Since 2013 primary public spending has fallen from 16.9% of GDP to 16% in 2016. Additional cuts would have put the most important social programmes at risk. The tax reform provides new resources for social investment. For example, we expect the education and health care systems to receive 1 percentage point (pp) of the total 3-pp increase in the general VAT rate, which rose from 16% to 19%. Additionally, the promotion of culture and sports will receive all the revenue generated by a new 4% tax on the consumption of voice data.
The main purpose of this structural reform was to improve the fiscal picture for the medium and long term. Additional revenue generated by the reform will start at 0.7% of GDP in 2017, double to 1.4% of GDP in 2019 and reach 2.5% of GDP by 2022. Another 0.6% of GDP will be generated by anti-evasion efforts. We expect anti-evasion strategies to trigger formalisation and compliance. In total, it will result in a revenue increase of 3.1% of GDP, about 23% higher than the non-reform scenario. Additionally, alleviating the tax burden for corporations will boost investment and job creation.
How do you evaluate the performance of the Treasury market, and would this type of financing suit infrastructure projects?
CÁRDENAS: Colombia’s Treasury market has recorded a very positive performance. The economic discipline the country has shown through responsible fiscal and monetary policy has allowed it to strengthen its macroeconomic fundamentals, which resulted in greater investor confidence. In fact, in 2014 JPM organ increased Colombia’s weighting on its well-tracked Government Bond Index-Emerging Markets. Since then, the share of foreign investors in local government bonds has increased from 6% to 25%. Moreover, in the first quarter of 2017 the market demand for Treasury bonds has been on average 2.5 times the amount offered by the government. All this reflects the confidence investors now have in the country.
The funds the government has raised through the Treasury market are one source of funding, yet they are not the most relevant for infrastructure projects. For these we are considering other alternatives, such as private participation. Additionally, the government has put in place the Financiera de Desarrollo Nacional, which mobilises the resources needed to finance infrastructure projects. Part of the reason for this is again largely down to being responsible in regards to macroeconomic fundamentals and keeping our debt profile on a sustainable path.
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