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Recent Financial Inequality Increase is All Parts of the World

Colombia will relax its fiscal deficit commitments. This was announced on Friday by the Minister of Finance, Alberto Carrasquilla, when he announced the conclusions of the meeting of the Fiscal Rule Advisory Committee, which took place last Wednesday. The reason: migration from Venezuela.

The fiscal rule, created in 2011 under Law 1473, is the government’s commitment to reduce the difference between the nation’s income and expenses, a commitment that has traditionally been adopted by recommendations of a Consultative Committee in which academics participate. researchers and congressmen (see box at the end).

In 2018, according to the minutes of the meeting of that committee carried out on Wednesday and known yesterday, Colombia fulfilled the commitment that this difference be 3.1% of the Gross Domestic Product (GDP, equivalent to about $ 1,000 billion) . The idea is that over the years that figure will be reduced.

In 2019, the objective was to reduce the deficit to 2.2% with respect to GDP. However, after receiving the observations of the Consultative Committee, the Government will adjust the target to 2.7%. In 2020, it will go from a commitment of 1.9% to 2.3%. However, in the medium term the objective remains as it was: that the deficit remains at 1%.

This adjustment is in response to the transitory pressure on public spending that is generating attention in education and health, among others, to the migrant population from Venezuela to Colombia. According to the Minister of Finance, until now it is estimated that between 1.1 and 1.2 million people have arrived from the neighboring country. Paying them costs about $ 5 billion a year (half a point of GDP).

It should be remembered that in previous weeks, organizations such as the OECD had recommended that Colombia flex its fiscal belt due to the unexpected effects of migration to the country due to the crisis in Venezuela. At that time he mentioned that European countries had taken similar paths to cushion the “exceptional influx” of refugees. He suggested, then, that Colombia follow a similar path, as long as fiscal discipline continues to be respected.

The green light for the country to relax a bit its commitments to the deficit was given that the impact of migration from Venezuela has been not only unexpected but temporary and that in the long term will be positive for Colombia. “The economic dividends of migration will materialize gradually as the Venezuelan population becomes integrated into economic activity and enters, above all, into formality. Thus, the Committee concludes that the size of the fiscal shock is finite both in years and in magnitude, “says the minutes.

He adds: “The uncertainty associated with the political and economic future of the neighboring country generates uncertainties about the migratory flow and the fiscal cost that the country will continue to assume in the coming years. Therefore, the Committee recommends monitoring the evolution of migration “, in order to eventually make decisions on the fiscal balance, as long as” any change “is” compatible with fiscal sustainability “.

According to the Committee, it is estimated that “the maximum number of immigrants could reach a range between 2.3 and 2.7 million people, which generates an annual shock on spending of 0.5% of GDP on average.”

Bruce MacMaster, president of ANDI, welcomed the decision: “(It is) perfectly reasonable the position of the Fiscal Rule Committee. A deficit of 2.7% is one of the lowest in history. Contrary to what has been said by some, it is perfectly responsible to open up a situation like the one created by migration, “he said in his Twitter account.

However, according to Leopoldo Fergusson, professor of economics at the Universidad de los Andes, the fiscal rule has been a costly way for the country to acquire credibility with international markets, therefore, for him, to make it more flexible and even abandon it could be a good idea, but not at the current juncture.

In his opinion, it is evident that the flexibilization occurs “as a consequence of the Government being in a bind to fulfill it”. In short, breaching Colombia’s commitment to itself would send a bad message to international markets.

Ricardo Bonilla, a professor at the National University, also believes that the government is sending the wrong message. “It is a decisive decision, because it means that, with everything that criticized the previous government, the current one has no alternative” and added that the goal of the deficit reaching 1%, in any case, will fall on nearby governments.

The announcement of the easing of the fiscal rule occurred in the midst of two other relevant economic news. On the one hand, the income of almost $ 8.2 billion for the nation on account of Ecopetrol’s dividends. But also the increase in unemployment by one full percentage point compared to February last year, up to 11.8%.

For Bonilla, Colombia was “aligning itself with a perspective” of an upturn in activities such as tourism and that the different “sectors began to adjust and that the unsettled (by the prices) of oil would be resolved”.

However, he adds, “the government, instead of giving continuity to that, sends wrong messages when returning to daily conflicts”, in reference to the situation on the border with Venezuela and its refusal to go to the department of Cauca, among others .