COLOMBIA'S 2008 BUDGET INCREASES SOCIAL AND

UNCLAS BOGOTA 007772

SIPDIS

SENSITIVE
SIPDIS

WHA/EPSC FOR PMAIER; EEB/OMA FOR ASIROTIC

E.O. 12958: N/A
TAGS: ECON EFIN PGOV CO
SUBJECT: COLOMBIA'S 2008 BUDGET INCREASES SOCIAL AND
DEFENSE SPENDING

REF: BOGOTA 6103


1. (SBU) SUMMARY: On October 16, Colombia's Congress approved
the 2008 national budget with a 9 percent spending increase
over the 2007 budget. Despite the increase, the GOC expects
to come in below its fiscal deficit target of 3.3 percent of
GDP while raising the primary surplus above 1 percent of GDP.
GOC officials say they will accomplish this by taking
advantage of improved investor confidence to refinance GOC
debt and lower servicing costs. The USD 62.7 billion budget
includes significant increases in national defense and social
spending in line with the Uribe Administration's national
development strategy, but continues to focus the majority of
national spending on debt service and constitutionally-
mandated transfers to local governments. END SUMMARY.

Overview
--------------


2. (U) The new budget allocates 51 percent to "government
operations", entailing personnel costs (10 percent of the
total budget),national government operating expenses (3
percent),and transfers to department and municipal
governments (38 percent). Remaining fiscal resources are
allocated to debt service (31 percent) and public sector
investment (18 percent). On the revenue side, approximately
53 percent of the budget will be financed from tax receipts,
37 percent from debt financing and 10 percent from public
enterprise profits.


More for Social and Defense Priorities
--------------


3. (SBU) Finance Ministry Budget and Public Credit Director
Julio Torres told EconOff October 29 that the 2008 budget
holds closely to President Uribe's national development
strategy to reinforce security gains and continue to reduce
poverty in Colombia. Torres highlighted the 25 percent
increase in defense and security spending as well as the 15
percent rise in social spending. In the social sector, the
GOC will increase the number of participants in the "Families
in Action" educational and health assistance program to 1.5
million, provide job training to more than 230,000 youth and
displaced persons, and increase housing allowances to more
than 150,000 people. The GOC will also expand clean water
and sewer access to 2 million people. The increases directly
reflect the Uribe Administration's priorities to consolidate
security improvements, nationalize costs currently covered by
Plan Colombia, and reduce the national poverty rate from 45
percent in 2007 to 35 percent by 2010. With the rise in
security spending, defense expenditures will consume 4.9
percent of GDP in 2008. However, the GOC's largest fiscal
obligations remain debt service (10.2 percent of GDP) and
transfers to local governments (11.3 percent of GDP).


Maintaining Fiscal Discipline
--------------


4. (SBU) Torres emphasized that the GOC's commitment to
fiscal discipline permeated the 2008 budget, with spending
cuts in areas such as transport, energy, and commerce. He
noted that the Finance Ministry based its revenue projections
on a conservative GDP growth rate of 5 percent and a
higher-than-expected inflation rate of 5.8 percent. In
comparison, local analysts expect 2007 GDP growth to approach
7 percent and estimate 2008 growth will be around 5.3
percent. Inflation has moderated since the beginning of 2007
and most observers expect 2008 inflation to come in under 5.5
percent. Torres also pointed out that Colombia's gross
public sector debt continues to fall (from 52 percent of GDP
in 2002 to 42 percent in 2007) as well as the portion of debt
denominated in foreign currency (from 49 percent in 2002 to
30 percent in 2007). Likewise, the GOC projects the primary
surplus (public expenditures not including interest payments)
to reach 1 percent of GDP by the end of 2007--the highest in
more than 12 years.


How to Pay For It
--------------
E


5. (SBU) Torres expressed confidence the GOC can afford the 9
percent rise in spending without increasing the fiscal
deficit as a percentage of GDP. The GOC will achieve this by
taking advantage of increased investor confidence from
Colombia's improved security situation and the nation's
rising credit rating to refinance significant portions of its
debt. Through restructuring debt at longer maturities and
lower interest rates, the GOC expects to lower its overall
debt service costs 1 percent of GDP in 2008. Torres
predicted Colombia will come in significantly within the 3.3
percent of GDP fiscal deficit target for 2007 and should do
so as well in 2008.


Challenges on the Horizon
--------------


6. (SBU) Solid economic growth and improved debt financing
options certainly provide Colombia additional space for
increased public spending and investment. However, Colombia
already carries a large debt burden and a change in the
current favorable international economic climate could dry up
access to lower-cost credit as well as curb domestic growth.
Likewise, the GOC expects tax revenues to decrease as much as
12 percent in 2008 due to a new deduction companies will have
to reinvest up to 40 percent of profits. Although the tax
deduction should foster private investment over the long
term, the near term revenue reduction will add pressure to
the GOC's fiscal deficit in the next several budget cycles.
This could reduce the pool of funds for sustained increases
in defense and social spending necessary to lock in
Colombia's impressive gains under the Uribe Administration.
Brownfield