On June 14, the National Government presented the Medium Term Fiscal Framework (MFMP)which is a document in which the macroeconomic and fiscal projections for 2023 are presented.
For the Autonomous Committee of the Fiscal Rule (Carf) this document was built with macroeconomic assumptions that, in general, it considers realistic and consistent with what analysts and markets expect.
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There will be a deterioration of both the fiscal deficit and the net debt of the Government
It also highlights that the MFMP foresees that by 2024 there will be a deterioration of both the fiscal deficit and the net debt of the Government, despite having approved two tax reforms in the last two years which will significantly increase the income of the Nation (by about 4 percent of GDP by 2024).
The 1.2 percent increase in GDP in primary spending that is scheduled between 2023 and 2024, imposes greater pressure on the Nation’s accounts and reverses the achievements in primary adjustment achieved after the pandemic, in 2022, and those that
expected for 2023 in the previous scenario.
“The primary balances of zero percent of GDP that would be obtained in 2023 and 2024 are lower than those programmed in the financial plan at the beginning of the year, and those necessary to stabilize the government’s debt,” says the Carf.
The committee also finds that the projected fulfillment of the deficit goal for 2024, 2025 and 2026 presented by the National Government in the MFMP, depends on non-structural income and uncertain nature (dispute arbitration), which should be considered as one-time transactions.
By making this adjustment, the spending foreseen in the MFMP would not meet the goals of the net structural primary balance of the fiscal rule in an amount close to 1 percent of GDP for 2024, 0.6 percent for 2025, and 0.3 percent. cent by 2026.
The MFMP presents a fiscal programming at the limit of compliance with the fiscal rule
According to the CARF, if the National Government budget is programmed for 2024 with a spending cap as provided for in the MFMP, would be giving rise to a possible breach of the Fiscal Rule Lawwhen the correspondence between structural expenses and income is not fulfilled.
As a result of the above, the Car says that the MFMP presented by the Government deviates from the objective of fiscal consolidation through the progressive reduction of the fiscal deficit and net debt, at least temporarily.
“Without the reduction in the two indicators (deficit and debt) convergence towards the objective is made difficult by the fiscal rule for 2026, once the proposed transition period ends”, he adds.
Another warning issued by the CARF is that the MFMP presents a fiscal programming that is at the limit of compliance with the fiscal rule, including additional income that you are not sure aboutby Dian management, equivalent to 1.3 percent of GDP.
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These reforms may represent a greater need for annual spending of more than 0.7 percent of GDP
Given the uncertainty affecting the macroeconomic and fiscal scenario and the global context, the CARF finds that it is not prudent to make a fiscal programming without any room for maneuver in the face of possible adverse events such as lower oil prices or production, a greater economic slowdown, a depreciation of the peso or persistently higher inflation.
Being at the limit of compliance, the MFMP does not show in the fiscal programming the probable additional expenses that would result from the National Government’s reform proposals, especially those derived from health and pension reforms.
The CARF estimates that, in the short term, these reforms may represent a greater need for annual spending of more than 0.7 percent of GDP. Given that the spending path proposed by the Government does not leave any margin, this incremental spending does not have fiscal space within the programming, and, consequently, the approval of such initiatives would require the search for new sources of structural income.
“The country has run out of space to carry out countercyclical fiscal policy in a prudent manner or to accommodate the increased public spending resulting from the reforms proposed by the Government itself,” says the Carf. That’s why he does a call for prudence in spending to comply with the fiscal rule.
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The FEPC deficit in 2023 amounts to about 18.5 trillion pesos
An issue that the CARF does praise is the government’s effort to advance in closing the gap between the regulated price and the international prices of gasoline and diesel to reduce the deficit of Fuel Price Stabilization Fund (FEPC) and pay outstanding debts.
Since October 2022, the Government has consistently observed the regulated price of gasoline, bringing the income to the producer from 5,064 to 8,323 pesos per gallon. Thus, the rate of accumulation of the FEPC deficit has been reduced.
According to CARF estimates, with the adjustment of regulated prices scheduled in the MFMP and the expected dynamics for international prices of
fuels and the exchange rate, the FEPC deficit in 2023 amounts to about 18.5 trillion pesosabout ten billion less than estimated at the beginning of the year.
