José Antonio Ocampo is the most cited Colombian economist in the world academy.  His arrival at the Treasury seeks to make changes, but responsible changes.

Reconcile an ambitious, reformist agenda, which presumes to be historic, with a serious economic crisis.

That is the starting point of Gustavo Petrowho this Sunday will become the first left-wing president in the history of Colombia.

Former guerrilla, economist, former mayor of Bogotá and prominent congressman for two decades, Petro came to power thanks to his proposal to change the background of this unequal and violent country.

His is perhaps the most ambitious government plan that has come to power. It proposes structural changes in the labor, pension, education and health systems. He aspires to approve the long-awaited and controversial agrarian reform. He wants to turn the economy towards clean and non-extractive production.

Petro, however, finds itself in a country in crisis that limits its room for maneuver: poverty, inequality, inflation, the value of the peso, indebtedness, and fiscal and current account deficits are in red. An anomaly for a traditionally stable economy.

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Added to this is the international context, where the large economies are on the verge of recession, inflation is soaring and the increase in interest rates in developed countries is hitting emerging economies such as Colombia.

Since being elected, Petro has devoted himself to allaying fears that his leftist agenda could translate into expropriations, unbridled public spending, or cornering the private sector.

To do so, he forged alliances with the traditional political parties, architects of the current Colombian model, and appointed a renowned social-democratic professor who worked for a decade at the UN and held that ministry 25 years ago as Minister of Finance. Jose Antonio Ocampo.

“I’m not going to propose crazy things, nor am I going to accept crazy things,” Ocampo told El Tiempo newspaper this week. “Modesty aside, my appointment is part of the credibility that the new government has of the commitment to keep the house in order.”

José Antonio Ocampo is the most cited Colombian economist in the world academy. His arrival at the Treasury seeks to make changes, but responsible changes.

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Problems

In the same interview, Ocampo warned about the complex situation facing the new government: “(It keeps me up at night) combining the need for fiscal adjustment with the demand for resources for greater spending on social programs.”

The joint report carried out this week by the incoming government reported having found an underfunded State, with enormous debts in the health sector, lack of resources in key entities, approved budgets without being able to execute and gaps in crucial subsidies such as gasoline.

The outgoing president, Iván Duque, defends his management as the one that invested the most in equity in history, and for having regularized hundreds of thousands of Venezuelan migrants and inaugurated important infrastructure works. Today Colombia is one of the fastest growing economies in the region, according to the latest IMF report.

However, Duque leaves with an approval rating of 20%, according to polls, and with criticism from experts such as Leopoldo Fergusson, a professor at the Universidad de los Andes: “Duque was very fiscally irresponsible, he did everything a candidate from orthodoxy as he was”.

Although there are indicators in his favor, in general terms, Duque leaves an economy in the red.
Although there are indicators in his favor, in general terms, Duque leaves an economy in the red.

“Everything done prior to the pandemic (increasing spending and making the fiscal rule more flexible with the argument of Venezuelan migration) made us receive the pandemic with public finances in crisis,” criticizes the economist.

Petro, then, if he wants to maintain a certain macroeconomic stability, will have to make an adjustment: cut state spending so that the fiscal deficit falls, and thus contain inflation and devaluation.

For that you need money. And it needs more money if it wants to fulfill its ambitious and diverse promises in education, transportation and a long list of hopes frustrated for decades.

Petro’s reforms depend on the pocket it has and issuing debt is not exactly an option, because the country already owes an equivalent of 50% of GDP, and interest is high since the reduction of the investment grade in the midst of a political crisis in 2021.

For all of the above, Petro’s legacy is at stake in his first reform: the tax reform.. Sensitive management since, just over a year ago, the country convulsed after a proposal presented by Duque.

Ocampo announced that the project will be announced on Monday, August 8, one day after assuming the presidency. And the leader of the Petrista caucus and president of the Senate, Roy Barreras, speaks of “fast track” approval in the first year of the legislature. They know that the honeymoon can be short.

“Petro stakes everything on the reform,” says Fergusson. “His ability not to scare, to get money and to give notions of direction.”

In Colombia, tax reforms are routine, but they became a sensitive issue after Duque's proposal in 2021 ended in protests.
In Colombia, tax reforms are routine, but they became a sensitive issue after Duque’s proposal in 2021 ended in protests.

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The solutions

Economist Marcela Eslava explains that the current tax system in Colombia has two structural problems: “The collection is insufficient to meet its constitutional obligation to reduce inequality and it is too heavy on companies, so it does not build equality or prosperity.”

To this are added the exemptions, intricate legal mechanisms used by thousands of Colombians to evade taxes. And a network of forms of collection cataloged by specialized organizations as one of the most complex tax systems in the world.

“There are many people who have made a fortune in Colombia and avoid fulfilling their contribution, which prevents us from building a fairer and safer society,” says Ocampo.

The new minister has had to deny reports that the tax on occasional earnings will be increased to 35% (today it is 10%), that VAT will rise and has reduced the urgency of one of Petro’s most controversial proposals in the campaign : End oil exploration, the country’s largest source of income.

Petro and Ocampo want to raise taxes without affecting the middle and lower classes.
Petro and Ocampo want to raise taxes without affecting the middle and lower classes.

Although the details are not known at the time of publishing this note, Ocampo says that the main objective of the reform is that high-income natural persons contribute more and that exemptions be regulated. It is also likely that he will promote a wealth tax for the wealthiest. In all of these Colombia they have much lower tax rates than what is recommended by international organizations.

With this, the reform hopes to collect enough to cover the deficit and pay the debt commitments, which is the most urgent. And Petro promised to increase assistance to the poorest the day after his inauguration.

The reform also hopes to alleviate the pressure on companies to encourage production, Ocampo’s obsession as a structuralist economist, a current that promotes equitable, efficient and developed capitalism.

During the campaign, Petro said that his tax reform would try to set aside 50 billion pesos, about US$11,000 million, equivalent to 5% of Colombian GDP. Its alot. It seems unfeasible. It is double what the Duque reform expected to raise, which triggered a social outbreak in 2021.

“But if any government has the political economy on its side to minimize the difficulties,” says Eslava, “it is the government of Petro, because the social mobilization that brought down the reform has been accompanied by him and the groups that felt outside are welcomed by him.”

Recently elected, without political wear and with his “national agreement” on the eve of his debut in Congress, Petro will probably propose the most ambitious tax reform in recent times. The success of his government will depend on it.

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