ECONOMIC SLOWDOWN PROMPTS CUTS TO COLOMBIAN

C O N F I D E N T I A L BOGOTA 000298

SIPDIS

E.O. 12958: DECL: 01/29/2019
TAGS: PGOV PREL PREF PTER MASS MCAP CO
SUBJECT: ECONOMIC SLOWDOWN PROMPTS CUTS TO COLOMBIAN
DEFENSE BUDGET

REF: A. BOGOTA 0007

B. 2008 BOGOTA 4577

Classified By: Political Counselor John Creamer
Reasons 1.4 (b and d)

SUMMARY
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1. (C) Summary. Reacting to a projected economic slowdown in
2009, the Government of Colombia (GOC) plans to cut the
national budget by $1.4 billion, including a proposed $190
million reduction to the defense budget. The proposal would
reduce future expenditures on ammunition, rifles,
communications equipment, infrastructure projects, fuel,
food, and uniforms. The proposed cuts would not directly
affect defense expenditures funded by the wealth tax, which
is expected to raise $3.7 billion between 2007-2011. Still,
the GOC's ability to sustain current levels of defense
spending after 2011, when the wealth tax expires, is in
doubt. End summary.

ECONOMIC SLOWDOWN PROMPTS CUTS
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2. (C) Reacting to a projected economic slowdown in 2009 (see
reftel A),the Colombian National Planning Department and the
Ministry of Finance have proposed $1.4 billion in cuts to the
2009 national budget of $67 billion (figures assume an
exchange rate of 2100 pesos to the dollar). The proposal
calls for trimming the $9 billion national defense budget by
roughly $190 million (400 million pesos). Defense spending
accounts for roughly 14% of the total Colombian budget, and
the Ministry of Defense (MOD) is being asked to absorb a
commensurate amount (approximately 14%) of the total budget
cut of $1.4 billion. The cuts could be reduced in the event
that revenues do not decline as much as expected in 2009 due
to the economic slowdown. Still, given the grim current
climate and the budget's assumption of a 3% growth rate in
2009, most analysts believe that revenue collection will be
even worse than currently projected.

MOD TRIES TO MINIMIZE THE PAIN
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3. (C) Half of the $190 million proposed defense cuts fall
under investment, which is controlled by the National
Planning Department, and would result in reduced expenditures
on ammunition, rifles, communications equipment, and
infrastructure. The other half would come out of the
operational budget, which is controlled by the Ministry of
Finance, and would result in reduced expenditures on fuel,
rations, and uniforms. The Director of Planning and Budget
at the MOD, Yaneth Giha, told us the Ministry is determined
not to let these cuts affect the nationalization of Plan
Colombia, including the GOC's commitment to take on fuel
costs. She said that the MOD will also not let the cuts
affect the tempo of military operations -- they would prefer
to instead postpone expensive infrastructure projects, such
as planned naval bases, which she said the Colombian military
can do without for now.


4. (C) The MOD is going over the 2009 budget line by line
with the National Planning Department and the Ministry of
Finance in an effort to identify non-critical areas that can
be cut, such as certain pension costs that are not
obligatory. Since approximately 90% of the defense budget
corresponds to fixed costs, the focus has been on the 10%
that is discretionary. Giha said that the cuts are painful
but show the GOC's prudent financial management. She said
some other government ministries feel that the MOD is getting
off too lightly.

WEALTH TAX EXPENDITURES UNTOUCHED
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5. (C) The proposed cuts do not directly affect the wealth
tax (impuesto al patrimonio),which is projected to raise
$3.7 billion from 2007-2011 (see reftel B). The wealth tax
revenues raised are included in the total defense budgets for
2007-2011. Consequently, the manpower, equipment and
intelligence upgrades procured utilizing wealth tax funds
will not be affected. Giha noted for example that the Kfir
modernization project will proceed as planned, and that an
additional 10,000 police will be hired over the next two

years using wealth tax funds. Giha said that President
Uribe's instructions were that wealth tax funds were "off
limits." However, since the wealth tax is levied as a 1.2%
tax on certain liquid assets, the slowing economy will likely
reduce future revenue collections.

POST-2011 DEFENSE BUDGET IN DOUBT
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6. (C) The MOD is currently planning its budget for 2010,
2011, 2012 and 2013. Officials believe that they can sustain
current operations through 2010, when President Uribe's
current term expires, but not past 2011. The GOC is gaming
several post-2011 scenarios, including financing future
operations through a public war debt. Giha predicted that
defense spending as a percentage of GDP would remain around
current levels (approximately 5.7%) given that most of the
defense costs are allocated to fixed costs such as salaries,
which cannot be reduced quickly. Still MOD officials are
hopeful that the terrorist and criminal organizations will be
weakened by 2011 to the point where fewer resources will be
required to combat them.
BROWNFIELD