(Bloomberg) -- Colombia’s congress is discussing a proposal that would nearly double central government transfers to regions, potentially increasing national debt by almost 15 percentage points of gross domestic product over the next decade.
The bill would require the government to move 46.5% of its revenue to cities and provinces by 2036, from 26% currently. This would cost the central government 327 trillion pesos ($76 billion) over the period, according to official estimates.
The reform is intended to bolster regional economies and give the nation a less centralized growth model. But the government’s own economists at the finance ministry and planning departments have published studies saying that the proposal is fiscally unsustainable, while a senior policymaker slammed it as reckless.
At a business forum on Tuesday, central bank co-director Roberto Steiner warned of “fiscal disaster” if the bill is implemented.
“It would put us in a very different scenario, which would have gigantic risks for macroeconomic stability and monetary policy,” Steiner said.
The constitutional reform proposal has already been passed by five of the eight debates needed for it to become law. If it is approved as expected, it is likely to be challenged in the constitutional court.
The full senate is debating the bill this week. If it gets approval, it will be very likely to pass, since the government commands an ample majority in the lower house.
Bogota-Centric
Interior Minister Juan Fernando Cristo said that criticism of the bill is coming from officials who are excessively Bogota-centric.
“Some sectors are navel-gazing and are seeing things from Bogota, not the regions, as if this were just a problem of money,” Cristo said in a congressional debate Tuesday.
Cristo said the government is open to some changes but will proceed with the bill despite fiscal warnings.
Colombia’s fiscal situation has continued to deteriorate since it lost its investment grade rating in 2021, when it posted a fiscal deficit of more than 7% of GDP. Since then, the government has been unable to get this back down to pre-pandemic levels of below 3%.
More Debt
A technical study sent by the finance ministry to lawmakers showed that the reform would be unsustainable and would undermine public finances. The planning department also warned that the country’s functioning would be threatened as the government would have to seek more financing through additional debt or more taxes.
The committee that oversees the nation’s fiscal rule forecasts a debt-to-GDP ratio of almost 70% by 2035, from 55% this year year, assuming the bill becomes law.
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