A bigger fiscal deficit and a tragicomedy unlikely to end well
The publication of the 2024 Medium-Term Fiscal Framework in June revealed some shocking developments about this year’s fiscal policy. Chief among them were a substantial shortfall in revenues, a humongous required reduction in primary spending and an increase in the year-end national central government deficit. Though by April the deficit was not the largest in recent history (that happened during the pandemic), it is among the highest. Assuming that for the rest of 2024 the monthly deficits behave in line with the average for each month during 2016-2023, the end-of-year accumulated result points to a 5.7% of GDP deficit instead of the 5.6% target in the June MTFF. Not only could the tax collection gap widen during the next few months, but spending might prove the largest enemy of fiscal consolidation.
In last month’s report we mentioned that the $5 billion budget cut implemented by the Finance Ministry is less than half the cut required. Counting on poor execution to do the trick by year end would be naïve to say the least; more cuts would be required. Unfortunately, Finance Minister Ricardo Bonilla said recently that further budget cuts, if required, could be decided upon in October. Surely that would be too late to produce any material effect. Bonilla might be paying lip service to his fellow cabinet members, who must be quite unhappy with the insufficient cut implemented so far. However, making additional cuts sooner might play in the government’s favor when discussing the 2025 budget: the investment portion will be much, much smaller than in 2024.
On July 29th, the Finance Ministry submitted to Congress its proposal for the 2025 budget. We don’t go into the general numbers of the overall budget, which can be found in many Finance Ministry presentations; instead, we focus on what the budget says about the National Central Government’s (NCG) numbers for next year.
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