Weak Tax Revenue Forces Colombia to Impose State Spending Freeze

(Bloomberg) -- Colombian President Gustavo Petro’s government is freezing budgets for state agencies and public institutions amid constraints from weak tax revenue.

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The government will impose a “partial and temporary” spending ban for projects that don’t already have authorization, the finance ministry said Thursday in a statement. The decision doesn’t compromise fiscal obligations or contracts, and spending should return to normal in the second half of the year as revenue improves, it added.

The Andean nation has entered a vicious cycle of sluggish growth and low tax revenue, which has the government considering wider budget deficits to give it some leeway to spend. Finance Minister Ricardo Bonilla has said complying with the current fiscal rule is too difficult while the country faces the weakest economic growth since 1999, excluding the pandemic.

The administration told markets in February it expected a shortfall equivalent to 5.3% of gross domestic product this year, but later this month it will publish a new mid-term fiscal plan. Economists are anticipating big spending cuts and clearer guidance about the long-term fiscal path.

“We expect the fiscal authority to yield on the attempt to fuel domestic demand, or at least curb its fiscal enthusiasm by reducing the annual expenditure objective,” JPMorgan economist Diego Pereira said in a report to investors last month.

Colombia will likely announce a spending reduction of about 1% of GDP, according to his forecasts.

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