VZCZCXYZ0011
RR RUEHWEB

DE RUEHBO #2017 1741931
ZNR UUUUU ZZH
R 231931Z JUN 09
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC 9516
INFO RUEHBR/AMEMBASSY BRASILIA 8991
RUEHCV/AMEMBASSY CARACAS 2356
RUEHLP/AMEMBASSY LA PAZ JUN LIMA 7659
RUEHQT/AMEMBASSY QUITO 8356
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS BOGOTA 002017 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN CO
SUBJECT: GOC SCRAMBLES TO DEAL WITH GROWING BUDGET WOES 
 
¶1.  SUMMARY.  (U) After several years of steady growth, the 
global economic crisis is hitting GOC coffers and generating 
a newly projected 2009 central government deficit of $7 
billion (3.7% of GDP), and a 2010 estimate of $11 billion 
(4.3% of GDP).  With continuing obligations in 
infrastructure, defense, social services and education, the 
fall in tax revenues is squeezing government accounts.  The 
GOC has floated a package of new taxes, increased borrowing 
and budget cuts to cover the shortfall, including changes to 
the government's "wealth tax" imposed to help fight 
terrorism.  The crisis has put a spotlight on GOC policies of 
offering generous tax breaks utilized to lure increased 
domestic and international investors, one assailed by critics 
for limiting governmental tools to maximize revenue. END 
SUMMARY. 
 
Faltering Tax Receipts, Growing Deficit 
--------------------------------------- 
 
¶2. (U) The Ministry of Finance now projects Colombia's growth 
for 2009 to fall to 0-0.5% from 2.5% in 2008. Falling tax 
revenues will put the deficit at 3.7% of GDP in 2009 (up from 
2.4% in 2008) and an anticipated 4.3% of GDP in 2010.  The 
GOC is considering a package of budget cuts, tax hikes and 
external borrowing to cover the shortfall. On the budget 
side, the GOC will reduce public investment spending from $5 
billion in 2009 to $4.2 billion in 2010.  The conditional 
cash transfer program "Familias en Accion", that currently 
provides assistance to 2.6 million Colombian families, will 
not expand as planned to 3 million families in 2010. There is 
also speculation that more cuts might come in education, 
environment, science and technology, and possibly health 
care.  Finance Minister Zuluaga announced that the GOC will 
seek an additional $1.5 billion in bonds--coming on the heels 
of a $1 million issuance in January--as well as a $12.9 
billion emission of local treasury certificates. 
 
 
¶3. (SBU) The tax picture is more complicated.  The GOC is 
considering several potential measures, all fraught with 
political difficulties as the 2010 election approaches.  The 
most likely scenario is making permanent the temporary 
"wealth tax", utilized to support increased expenditures on 
domestic security.  Sergio Clavijo of the National 
Association of Financial Institutions (ANIF) suggests 
lowering the gross capital threshold at which the 1.2% tax 
applies to USD $100,000 from USD $1.5 million.  Mauricio 
Santamaria of leading think-tank Fedesarollo argues for a 
complete tax reform to simplify the value-added tax, 
eliminate employer assessments that fund worker programs, 
limit hemorrhaging tax exemptions, and lower the corporate 
tax rate.  He claims that such a proposal would increase 
revenues by 2% of GDP, but acknowledged that President Uribe 
has never been a friend of such sweeping reforms. 
 
 
Tax Breaks Under Fire 
--------------------- 
 
¶4.  (SBU) Fiscal woes have fed growing criticism of GOC 
policies to expand free trade zones and enter into "judicial 
stability" contracts that guarantee investors a defined tax 
treatment for a 20-year period.  ANIF's Clavijo estimates 
that these policies cost the central government some $3.5 
billion annually in lost revenues, a situation that 
Colombia's former tax administration director calls "a tale 
of a gap foretold." Beyond reduced revenue, these policies 
severely limit the options GOC policymakers have at their 
disposal to increase revenues.  Former World Bank Chief 
Economist Guillermo Perry has been a particularly severe 
critic of the government's measures.  He argues -- a view 
supported by a consultative group of ex-Ministers of Finance 
-- that the favorable external environment and improved 
security are sufficient motors to spur investment, and that 
the "additional stimulus (is) unnecessary and rather 
imprudent given the existing high central government deficit 
and public debt levels."  American Chamber of Commerce 
Executive Director Miguel Gomez, while admitting that the 
focus on investment-led job creation is important in these 
difficult times, concurs that the web of subsidies and 
differential tax rates has helped put public finances in a 
bind. 
Brownfield