VZCZCXYZ0002
RR RUEHWEB

DE RUEHBO #7772/01 3042041
ZNR UUUUU ZZH
R 312041Z OCT 07
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC 9839
INFO RUEHBR/AMEMBASSY BRASILIA 7834
RUEHCV/AMEMBASSY CARACAS 9487
RUEHPE/AMEMBASSY LIMA 5571
RUEHZP/AMEMBASSY PANAMA 0769
RUEHQT/AMEMBASSY QUITO 6211
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS BOGOTA 007772 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
WHA/EPSC FOR PMAIER; EEB/OMA FOR ASIROTIC 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV CO
SUBJECT: COLOMBIA'S 2008 BUDGET INCREASES SOCIAL AND 
DEFENSE SPENDING 
 
REF: BOGOTA 6103 
 
¶1. (SBU) SUMMARY: On October 16, Colombia's Congress approved 
the 2008 national budget with a 9 percent spending increase 
over the 2007 budget.  Despite the increase, the GOC expects 
to come in below its fiscal deficit target of 3.3 percent of 
GDP while raising the primary surplus above 1 percent of GDP. 
 GOC officials say they will accomplish this by taking 
advantage of improved investor confidence to refinance GOC 
debt and lower servicing costs.  The USD 62.7 billion budget 
includes significant increases in national defense and social 
spending in line with the Uribe Administration's national 
development strategy, but continues to focus the majority of 
national spending on debt service and constitutionally- 
mandated transfers to local governments. END SUMMARY. 
 
Overview 
-------- 
 
¶2. (U) The new budget allocates 51 percent to "government 
operations", entailing personnel costs (10 percent of the 
total budget), national government operating expenses (3 
percent), and transfers to department and municipal 
governments (38 percent).  Remaining fiscal resources are 
allocated to debt service (31 percent) and public sector 
investment (18 percent).  On the revenue side, approximately 
53 percent of the budget will be financed from tax receipts, 
37 percent from debt financing and 10 percent from public 
enterprise profits. 
 
 
More for Social and Defense Priorities 
-------------------------------------- 
 
¶3. (SBU) Finance Ministry Budget and Public Credit Director 
Julio Torres told EconOff October 29 that the 2008 budget 
holds closely to President Uribe's national development 
strategy to reinforce security gains and continue to reduce 
poverty in Colombia.  Torres highlighted the 25 percent 
increase in defense and security spending as well as the 15 
percent rise in social spending.  In the social sector, the 
GOC will increase the number of participants in the "Families 
in Action" educational and health assistance program to 1.5 
million, provide job training to more than 230,000 youth and 
displaced persons, and increase housing allowances to more 
than 150,000 people.  The GOC will also expand clean water 
and sewer access to 2 million people.  The increases directly 
reflect the Uribe Administration's priorities to consolidate 
security improvements, nationalize costs currently covered by 
Plan Colombia, and reduce the national poverty rate from 45 
percent in 2007 to 35 percent by 2010.  With the rise in 
security spending, defense expenditures will consume 4.9 
percent of GDP in 2008.  However, the GOC's largest fiscal 
obligations remain debt service (10.2 percent of GDP) and 
transfers to local governments (11.3 percent of GDP). 
 
 
Maintaining Fiscal Discipline 
----------------------------- 
 
¶4. (SBU) Torres emphasized that the GOC's commitment to 
fiscal discipline permeated the 2008 budget, with spending 
cuts in areas such as transport, energy, and commerce.  He 
noted that the Finance Ministry based its revenue projections 
on a conservative GDP growth rate of 5 percent and a 
higher-than-expected inflation rate of 5.8 percent.  In 
comparison, local analysts expect 2007 GDP growth to approach 
7 percent and estimate 2008 growth will be around 5.3 
percent.  Inflation has moderated since the beginning of 2007 
and most observers expect 2008 inflation to come in under 5.5 
percent.  Torres also pointed out that Colombia's gross 
public sector debt continues to fall (from 52 percent of GDP 
in 2002 to 42 percent in 2007) as well as the portion of debt 
denominated in foreign currency (from 49 percent in 2002 to 
30 percent in 2007).  Likewise, the GOC projects the primary 
surplus (public expenditures not including interest payments) 
to reach 1 percent of GDP by the end of 2007--the highest in 
more than 12 years. 
 
 
How to Pay For It 
----------------- 
E 
 
¶5. (SBU) Torres expressed confidence the GOC can afford the 9 
percent rise in spending without increasing the fiscal 
deficit as a percentage of GDP.  The GOC will achieve this by 
taking advantage of increased investor confidence from 
Colombia's improved security situation and the nation's 
rising credit rating to refinance significant portions of its 
debt. Through restructuring debt at longer maturities and 
lower interest rates, the GOC expects to lower its overall 
debt service costs 1 percent of GDP in 2008.  Torres 
predicted Colombia will come in significantly within the 3.3 
percent of GDP fiscal deficit target for 2007 and should do 
so as well in 2008. 
 
 
Challenges on the Horizon 
------------------------- 
 
¶6. (SBU) Solid economic growth and improved debt financing 
options certainly provide Colombia additional space for 
increased public spending and investment.  However, Colombia 
already carries a large debt burden and a change in the 
current favorable international economic climate could dry up 
access to lower-cost credit as well as curb domestic growth. 
Likewise, the GOC expects tax revenues to decrease as much as 
12 percent in 2008 due to a new deduction companies will have 
to reinvest up to 40 percent of profits.  Although the tax 
deduction should foster private investment over the long 
term, the near term revenue reduction will add pressure to 
the GOC's fiscal deficit in the next several budget cycles. 
This could reduce the pool of funds for sustained increases 
in defense and social spending necessary to lock in 
Colombia's impressive gains under the Uribe Administration. 
Brownfield