VZCZCXYZ0017
RR RUEHWEB

DE RUEHGT #1506/01 3400825
ZNR UUUUU ZZH
R 050825Z DEC 08
FM AMEMBASSY GUATEMALA
TO RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/SECSTATE WASHDC 6579
INFO RUEHC/CENTRAL AMERICAN BASIN COLLECTIVE

UNCLAS GUATEMALA 001506 
 
SENSITIVE, SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN SOCI PGOV GT
SUBJECT: BUDGET/TAX REFORM VOTE VICTORY FOR COLOM 
 
¶1. (SBU) Summary:  On November 21, Congress passed President 
Colom's "solidarity tax" (ISO) and 2009 budget of Quetzales 
49.7 billion (approximately $6.5 billion).  The successful 
passage of these measures is a significant victory for 
President Colom and demonstrates his ability, at least for 
now, to put together a coalition to pass controversial 
measures in Congress over the opposition of Guatemala's 
powerful private sector.  The legislation capped a year-long 
effort to promote raising taxes and increasing overall 
spending by 17 percent -- focused mainly on security (25.5 
percent increase), health (24.6 percent), and education (16.7 
percent).  In addition, Colom's controversial conditional 
cash transfer program "Mi Familia Progresa" was positioned to 
receive a six-fold increase in funding.  The budget was 
funded by a modest increase in taxes and higher international 
borrowing (the 2009 deficit is projected to be 2.3 percent of 
GDP).  The increased spending aligns with Colom's vision of 
providing more state assistance to alleviate Guatemala's 
chronic poverty and malnutrition and supports USG goals of 
increasing investment in health and education in Guatemala. 
The Ministry of the Interior and Ministry of Defense also 
received additional funds that will provide Guatemala with a 
stronger base to take advantage of Merida Initiative programs 
planned for 2009.  End Summary. 
 
------------- 
Fiscal Reform 
------------- 
 
¶2. (U) From the outset of his administration, President Colom 
has pursued comprehensive reform of the tax system to raise 
the revenues necessary to fund the security, social and rural 
development programs promised during his campaign.  The basic 
outlines of the plan were drafted before he took office on 
January 14.  After taking office, Colom's economic team, led 
by Finance Minister Juan Alberto Fuentes Knight, refined the 
plan within the administration, with select members of 
Congress, and with international financial institutions 
(particularly the IADB). 
 
¶3. (SBU) In May, Colom unveiled a plan that would reform much 
of the tax system and increase tax revenues by 1.7 percent of 
GDP once fully phased in.  Colom invited representatives from 
the public and private sectors, civil society, and the 
diplomatic community to attend the unveiling.  The private 
sector, upset at having been excluded from the drafting 
phase, boycotted the ceremony (Note:  Fuentes Knight told 
Econoff that the private sector was excluded to ensure that 
the Administration would be able to develop a technically 
sound plan that was not subject to private sector parochial 
interests.  End note). 
 
¶4. (SBU) The boycott reminded the administration that private 
sector concerns and possible opposition could imperil passage 
of the reform.  The government responded by organizing a 
series of briefings for various private sector groups on the 
merits of the reform.  The private sector groups, however, 
were not persuaded.  In June, Fuentes Knight asked the 
Embassy to intervene with private sector leaders.  During 
subsequent meetings with private sector leaders, Embassy 
officials raised the message that Guatemala's 
resource-starved state needed additional tax revenue for 
security and development programs and that the private sector 
should engage constructively to ensure the best possible tax 
reform plan.  At the time, most private sector leaders agreed 
to negotiate with the government and no public denunciations 
of the plan were issued by private sector representatives. 
 
¶5. (SBU) During the summer Congressional recess, oil and food 
prices spiked and the Guatemalan economy, especially the 
construction sector, showed signs of a sharp slowdown.  As 
the economy slowed, business leaders became increasingly 
uneasy with the prospect of higher taxes and began to 
manifest their opposition privately with the Colom 
Administration.  The Administration continued to negotiate 
with the private sector and also began to worry about the 
politics of passing controversial legislation in a fractious 
Congress.  To gain successful passage of the reform, Colom 
needed 80 of the 158 votes in Congress.  Colom was concerned 
about his ability to garner sufficient support in Congress 
given the difficulty the administration had in the Spring in 
winning approval for relatively non-controversial funding 
measures that were required to finance the previously 
approved 2008 budget.  To begin building support within 
Congress, members of Colom's fiscal reform team fanned out to 
key municipalities controlled by the ruling UNE party (49 
votes) as well as the smaller parties such as GANA (24 votes) 
and FRG (14 votes).  Administration officials held public 
seminars on the merits of the tax plan and private meetings 
with mayors (which, according to several sources, were 
horse-trading sessions where local projects were discussed). 
Mayors were then asked to contact bench leaders in Congress 
to lobby for support for the tax plan. 
 
¶6. (U) Meanwhile, private sector leaders and the Colom 
Administration reached a grand bargain on tax reform. 
Private sector leaders agreed to withhold opposition to the 
tax plan if the Colom administration removed the proposed 
income tax reform provisions of the tax plan.  The Colom 
administration agreed with two conditions: the first that 
income tax reform would be revisited in early 2009 and the 
second that a one percent tax to replace the expiring IETTAP 
(equivalent to an Alternative Minimum Tax) be instituted on a 
permanent basis until the income tax issue was resolved. 
 
¶7. (SBU) With the private sector compromise and the 
grass-roots efforts underway to build a coalition to support 
the tax reform in Congress, the pieces were in place by early 
September to pass the tax reform.  Although the 
Administration submitted the tax reform plan to the Finance 
Committee concurrently with the budget in early September, 
subsequent tactical errors and aggressive budget goals nearly 
led the consensus on tax reform to unravel. 
 
----------- 
2009 Budget 
----------- 
 
¶8. (SBU) In early September, the Ministry of Finance 
submitted the budget proposal to Congress with a deadline of 
November 30, 2008.  The Colom administration's proposed 
budget included an overall increase of 17 percent from Q42.5 
billion in 2008 (approximately $5.6 billion) to Q49.7 billion 
for 2009 ($6.5 billion).  Press, private sector leaders and 
opposition parties questioned the wisdom of large 
across-the-board increases given the economic slowdown and 
its subsequent impact on tax collection.  In addition, the 
budget for executive secretariats and other executive 
expenditures is not subject to the same standard of 
transparency as cabinet ministries.  The Social Cohesion 
Council and the "Mi Familia Progresa" program are 
administered by First Lady Sandra Torres de Colom (a 
controversial figure widely rumored to have presidential 
aspirations), and some observers feared the concentration of 
budget resources in the executive to be administered by a 
non-elected official with little Congressional oversight 
would lead to the diversion of funds for political purposes 
and possibly corruption. 
 
¶9. (SBU) The large increases in spending were to be financed 
in part by additional borrowing and by the tax reform 
proposal.  Central to the funding assumptions was 
substitution of the IETTAP with the new "solidarity tax" 
(ISO) as previously agreed to by the private sector. 
However, the administration decided to request a 1.25 percent 
tax in its submitted proposal rather than the 1 percent it 
had agreed to with the private sector.  Although the 
administration wanted the extra revenue, the change in the 
previously agreed rate was a tactical ploy to ensure the tax 
burden due to the ISO exceeded what businesses would have 
paid under the originally proposed income tax regime.  The 
administration hoped to position themselves favorably for 
subsequent negotiations in 2009 on reforming the income tax. 
The move backfired.  The private sector, worried about 
increased taxes and spending during an economic downturn, 
concerned about transparency in an executive only moderately 
friendly to business interests, and incensed by the surprise 
change in the ISO, moved to oppose the budget and tax package. 
 
¶10. (SBU) With the November 30 deadline looming, both sides 
took their arguments public -- the Colom Administration 
arguing the virtues of increased spending on the poor and the 
private sector arguing that increased spending was reckless 
and contained few transparency safeguards.  Colom and his UNE 
party convinced most parties to support or remain silent in 
the budget debate but the opposition found an advocate in the 
26-member Partido Patriota (PP) that used every parliamentary 
procedure possible in an unsuccessful attempt to delay the 
vote.  The debate denigrated into mutual recriminations, with 
UNE bench leader Mario Taracena lashing out at the PP's 
Anabella de Leon calling her "fat and old" and the government 
organizing transportation and paying between Q50 to Q75 to 
thousands of protesters to march on Congress to support the 
tax measure (the Administration denied their involvement). 
Although the debate was delayed and the mobilization of the 
protesters highlighted the importance of the vote for 
President Colom, the final result was not close.  All major 
parties with the exception of Partido Patriota supported both 
the ISO tax and budget measures, giving Colom a decisive 
victory. 
 
¶11. (U) The approved 2009 budget increased spending on 
security 25.5 percent from Q2.6 billion to Q3.2 billion 
(approximately $340 million to $430 million), health 24.6 
percent from Q3.0 billion to Q3.7 billion ($390 million to 
$491 million), education 16.7 percent from Q6.5 billion to 
Q7.5 billion ($846 million to $998 million), and 
infrastructure 53.1 percent from Q3.0 billion to Q4.5 billion 
($390 million to $604 million) that included new spending and 
some construction debt inherited from the previous 
Administration.  In addition, presidential secretariats and 
other executive agencies received a 35.7 percent increase to 
Q2.7 billion ($355 million) and the Ministry of Defense 
increased by 2.8 percent to Q1.3 billion ($171 million). 
Agriculture, Foreign Affairs, and Public Finance are the only 
ministries to receive reductions in their budgets.  The 
budget also provided the Finance Ministry with wide latitude 
to make interagency transfers.  Final numbers were not 
ublished for President Colom's signature conditiona cash 
transfer program -- "Mi Familia Progresa,"but the September 
request included a nearly six-fold increase from Q145 million 
in 2008 to Q1 billion in 2009 ($19 million to $132 million). 
 
¶12. (U) A major portion of the revenues for 2009 were 
approved, including the new ISO tax at 1 percent and a few 
international loans.  However, two parties that supported the 
budget (GANA and Bancada Guatemala) proposed lowering the new 
first-time car registration fee from 26 percent of the car's 
value to 22 percent and a number of international loans 
remained pending in Congress.  The final tax and loan revenue 
measures were not passed by the November 30, 2008 end of the 
fiscal year deadline and remain pending in Congress. 
 
¶13. (SBU) Comment:  The long fight for increased spending and 
tax revenues reflects President Colom's ability, at least for 
now, to manage a fractious Congress and use his political 
muscle to push through controversial programs.  The increased 
resources for Guatemala's chronically underfunded state will 
help President Colom implement his programs to invest more in 
the health and education of poor Guatemalans as well as 
strengthen security institutions.  By increasing taxes and 
spending, Colom has deviated slightly from Guatemala's 
traditional approach of following sound macroeconomic policy, 
maintaining low taxes, and pursuing conservative fiscal 
management that kept the fiscal deficit at or below 2 percent 
of GDP.  The traditional approach helped Guatemala avoid some 
of Latin America's worst hyper-inflation and debt crises of 
the past thirty years, however, it resulted in weak state 
institutions unable to provide basic security, education, 
healthcare and physical infrastructure to its citizens.  The 
stage has been set for the debate to continue in 2009 with a 
major reform of the tax system the goal of the 
Administration.  The alienation of the private sector during 
the late stages of the tax reform debate, however, will 
complicate Colom's relationship with this powerful 
constituency and may derail attempts to increase revenues and 
spending again next year.  We hope that expanded resources in 
the 2009 approved budget will begin to address pressing 
social and security needs and compliment the investment the 
USG is making through its development programs and the Merida 
Initiative. 
Lindwall