Colombia: Fiscal adjustment will continue in 2008

The Ministry of Finance recently presented to Congress the budget law proposal for 2008. The project will be debated during the rest of the semester and most likely will be approved sometime in early December. There are at least four points that are worth noting in this proposal.

First, the government’s effort to consolidate the military is, once again, very explicit. Military expenditure both in personnel and equipment will grow significantly with respect to 2007. Personnel expenditure will grow about 16% and investment in military equipment more than 200%. 

Second, during 2008, the two main items of expenditure will be transfers to regions and to social security (12.5% of GDP) and debt payments (10.3% of GDP). Together they account for two thirds of the budget. Social security (pensions) payments accounted for 4.2% of GDP in 2007, will rise to 4.5% in 2008, 4.7% in 2009, and will remain at 4.8% thereafter.

Third, despite the high growth rates in military expenditure, an effort to reduce government expenditure to GDP is notorious. Assuming a real growth rate of GDP of 5% during 2008 and inflation around 3.5%, government expenditure would be reaching 32.8% of GDP in 2008, which is exactly the same figure of 2007’s budget. Excluding social security payments and transfers to regional governments, expenditure to GDP falls from 21.1% in 2007 to 20.3% in 2008.

Fourth, the expenditure schedule for 2008 is in line with a primary surplus of 2.6% of GDP in 2008, which will continue with the reduction in the debt to GDP ratio that has been seen during the past years. This assumes that international financial conditions might be tightened but not drastically, and that the COP will depreciate 8% during 2008.

Reactions to the law project have been mixed. Many local analysts have asked for more adjustment. While this might be desirable, it is very difficult to make it feasible. As noted above, two thirds of the budget is made up of pension payments, debt payments, and transfers to the regional governments. No reasonable government may want to fiddle with that. Of the other third of the budget, most expenditure items are tied to specific laws, which modifying might be very costly politically. Certainly, the government could chose to cut on military spending, but that also could be particularly risky in the current political environment. Nonetheless, there seems to be adjustment in areas where it is reasonable, and this is good news. Expenditure appears to be under control as well as debt to GDP ratios, and the economy is still performing pretty well. Both second quarter growth figures (around 7.5% growth) as well as the latest investment real growth figures (31%) are pretty comforting and supportive of a strong performance and  hence of fiscal stability.  If the current financial turmoil is contained there is no reason to foresee that the fiscal adjustment that Colombia has shown during the past 5 years will come to an end. In short, fiscal adjustment will continue in 2008. It might not be fast, but its steady.

2 Responses to "Colombia: Fiscal adjustment will continue in 2008"

  1. Vitoria Saddi   September 5, 2007 at 12:57 pm

    Dear Arturo, Is the fiscal improvement in Colombia due to greater economic growth (increasing tax revenues) or due to a decrease in spending? Great piece!

  2. Anonymous   September 5, 2007 at 5:45 pm

    Very good and interesting piece. Under which external shocks would the debt dynamics become a more serious problem? I.e. which level of real depreciation and/or increase in country spreads would create serious fiscal problems? And should one worry about such a scenario or not?