Colombia’s Attempt at Fiscal Reform: The First of Many in Latin America

By Alfonso Garza-

Steven Grattan/Al Jazeera]

In April 2021, in the middle of a deadly pandemic, the government of Iván Duque, the current president of Colombia, proposed a bill reform that would increase fiscal revenue. Duque affirmed that such reform was necessary in order to pay part of the increasing debt that the country has accumulated over the last two years and to avoid an even further decrease of its international credit score.


The proposed tax reform, also known as Sustainable Solidarity Law, would have increased the taxpayer base, meaning that the threshold for which income is subject to tax would be lowered, thereby increasing the number of taxpayers in the country. The Bill also sought to tackle climate change by imposing taxes on gasoline and diesel, plus creating an additional tax for single-use plastics. With the imposition of this tax, Duque had planned to collect an additional 28 trillion pesos (6,850 million USD).


The announcement of the tax reform brought social upheaval to the country starting on April 28th. In spite of the pandemic, Colombians showed their discontent by protesting in the streets. In turn, the Colombian government responded with military force and severe oppression similar to, some would say, that used against drug cartels and organized crime. So far, over 27 have already lost their lives, some at the hands of the police, and at least have 87 disappeared. The administration of Iván Duque decided to withdraw the fiscal reform as a result of the increasing discontent evidenced throughout the country. However, the government’s response to the first protests further intensified social discontent, and the protests continued even with the abandonment of the reform.


Although the reform did not go through this time, sooner or later, a fiscal reform will be needed. If Colombia and other Latin American countries want to avoid skyrocketing inflation rates over the following years, they need to seriously think about restructuring their debt.


Colombia has been one of the most affected countries by the pandemic. According to official figures, just after Brazil and Mexico, Colombia places third in the number of deaths caused by Covid-19 in Latin America. The government has been forced to close the borders more than once and the capital Bogotá has reduced the working week to four days only, and imposed an 8 pm curfew. However, Colombia is not the only country in the region that has increased its debt in order to offset the effects of the pandemic.


In a region where more than 50% of the population lives under the poverty line, citizens cannot afford to isolate during a pandemic. Many people expressed their views as “we can either die of Covid, or die of hunger”. Despite government regulations and recommendations, many citizens still decided to leave their homes in order to feed their families and loved ones. Borders and economies were reopened at the end of the first wave when Latin America saw the light at the end of the tunnel; however, the P.1 strain first detected in Brazil rapidly spread across the region, forcing governments to close borders and impose curfews in their largest cities once again.


In order to incentivize people to stay at home, many governments in Latin America opted to provide their citizens with periodic cash stimuli. In the case of Colombia, these rescue packages amounted to $44 USD a month per person, for 3 million eligible citizens. According to the International Monetary Fund, Colombia has so far spent 4.1% of its GDP on these rescue packages. This additional spending, plus the lack of economic activity, has resulted in massive debt increases. As stated by The Economist Intelligence Unit data, Latin American foreign debt has risen from 64% to 72% of GDP in just one year.

S&P Global

Besides increasing its foreign debt, Latin America’s economy contracted by 7% during 2020. Standard & Poor’s, a credit-rating agency, reduced the region’s credit score by 13 points, further motivating foreign investors to place their money elsewhere.


For Latin Americans, it does not seem like the pandemic will end any time soon. With the exception of Chile and Uruguay, vaccination rates in the region have been relatively slow. For instance, at the time of writing (7 may 2021), Colombia had administered over 5 million jabs, enough to have vaccinated about 5.2% of its population, considering every person needs two doses. Most governments in the region have not even been able to secure enough vaccines to cover their elder populations.


With all this in mind, It is likely that many governments in the region will attempt to implement similar fiscal reforms as Colombia has done in order to offset the economic impact of the pandemic. In a region where over 50% of the population lives under the poverty line, and social discontent is rife, the increase in taxes is expected to bring social upheaval. The pandemic has further increased health and economic concerns in Latin America, and the region has not forgiven, nor forgotten its pre-covid situation. In 2019, before the pandemic hit the South American region, multiple countries, including Bolivia, Chile, Colombia, Ecuador, and Perú, were going through a period of social discontent expressed by massive protests in the streets. Every protest was different, but their common denominator was marked by concerns about corruption and limited economic opportunities. Although the pandemic temporarily halted these social demonstrations, the reasons behind the protests remain and may have even increased.


The end of the pandemic will likely bring economic restructuring to the region. If the governments of Latin America do not listen to the demands of their citizens, this restructuring will surely be accompanied by a series of catastrophic social eruptions. Latin American authorities will have to handle these social demonstrations in a humane, organized manner, and leave oppression only as memories of times when Latin American regimes violated thousands of human rights, leaving scars and worries in the history of these countries. Today, the attempted tax reforms in Colombia, are just an example of what is yet to come in Latin America as governments try to navigate their way out of economic turmoil.

 

Sources:


https://amp.economist.com/the-americas/2021/05/01/how-will-latin-americas-covid-19-bill-be-paid?__twitter_impression=true


https://www.reuters.com/world/americas/colombias-president-withdraws-tax-reform-after-protests-2021-05-02/


https://www.bbc.com/mundo/noticias-america-latina-56966451


https://elpais.com/internacional/2021-05-03/duque-trata-de-impulsar-una-nueva-reforma-tributaria-en-colombia.html


https://www.nytimes.com/es/2021/04/29/espanol/opinion/colombia-protestas.html


https://www.france24.com/es/programas/econom%C3%ADa/20210416-colombia-explicacion-reforma-tributaria-ivan-duque-impuesto-valor-agregado


https://www.nytimes.com/es/2021/05/05/espanol/protestas-policia-colombia.html