GOC SCRAMBLES TO DEAL WITH GROWING BUDGET WOES

UNCLAS BOGOTA 002017

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN CO
SUBJECT: GOC SCRAMBLES TO DEAL WITH GROWING BUDGET WOES


1. SUMMARY. (U) After several years of steady growth, the
global economic crisis is hitting GOC coffers and generating
a newly projected 2009 central government deficit of $7
billion (3.7% of GDP),and a 2010 estimate of $11 billion
(4.3% of GDP). With continuing obligations in
infrastructure, defense, social services and education, the
fall in tax revenues is squeezing government accounts. The
GOC has floated a package of new taxes, increased borrowing
and budget cuts to cover the shortfall, including changes to
the government's "wealth tax" imposed to help fight
terrorism. The crisis has put a spotlight on GOC policies of
offering generous tax breaks utilized to lure increased
domestic and international investors, one assailed by critics
for limiting governmental tools to maximize revenue. END
SUMMARY.

Faltering Tax Receipts, Growing Deficit
--------------


2. (U) The Ministry of Finance now projects Colombia's growth
for 2009 to fall to 0-0.5% from 2.5% in 2008. Falling tax
revenues will put the deficit at 3.7% of GDP in 2009 (up from
2.4% in 2008) and an anticipated 4.3% of GDP in 2010. The
GOC is considering a package of budget cuts, tax hikes and
external borrowing to cover the shortfall. On the budget
side, the GOC will reduce public investment spending from $5
billion in 2009 to $4.2 billion in 2010. The conditional
cash transfer program "Familias en Accion", that currently
provides assistance to 2.6 million Colombian families, will
not expand as planned to 3 million families in 2010. There is
also speculation that more cuts might come in education,
environment, science and technology, and possibly health
care. Finance Minister Zuluaga announced that the GOC will
seek an additional $1.5 billion in bonds--coming on the heels
of a $1 million issuance in January--as well as a $12.9
billion emission of local treasury certificates.



3. (SBU) The tax picture is more complicated. The GOC is
considering several potential measures, all fraught with
political difficulties as the 2010 election approaches. The
most likely scenario is making permanent the temporary
"wealth tax", utilized to support increased expenditures on
domestic security. Sergio Clavijo of the National
Association of Financial Institutions (ANIF) suggests
lowering the gross capital threshold at which the 1.2% tax
applies to USD $100,000 from USD $1.5 million. Mauricio
Santamaria of leading think-tank Fedesarollo argues for a
complete tax reform to simplify the value-added tax,
eliminate employer assessments that fund worker programs,
limit hemorrhaging tax exemptions, and lower the corporate
tax rate. He claims that such a proposal would increase
revenues by 2% of GDP, but acknowledged that President Uribe
has never been a friend of such sweeping reforms.


Tax Breaks Under Fire
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4. (SBU) Fiscal woes have fed growing criticism of GOC
policies to expand free trade zones and enter into "judicial
stability" contracts that guarantee investors a defined tax
treatment for a 20-year period. ANIF's Clavijo estimates
that these policies cost the central government some $3.5
billion annually in lost revenues, a situation that
Colombia's former tax administration director calls "a tale
of a gap foretold." Beyond reduced revenue, these policies
severely limit the options GOC policymakers have at their
disposal to increase revenues. Former World Bank Chief
Economist Guillermo Perry has been a particularly severe
critic of the government's measures. He argues -- a view
supported by a consultative group of ex-Ministers of Finance
-- that the favorable external environment and improved
security are sufficient motors to spur investment, and that
the "additional stimulus (is) unnecessary and rather
imprudent given the existing high central government deficit
and public debt levels." American Chamber of Commerce
Executive Director Miguel Gomez, while admitting that the
focus on investment-led job creation is important in these
difficult times, concurs that the web of subsidies and
differential tax rates has helped put public finances in a
bind.
Brownfield