Colombia will need spending cuts if tax bill fails, official says

By Nelson Bocanegra and Carlos Vargas

BOGOTA, April 21 (Reuters) - Colombia will have to implement stringent spending cuts, hitting investment plans, if congress does not approve a tax reform proposal the government hopes will raise an additional $6.44 billion, Vice Finance Minister Juan Pablo Zarate told Reuters.

The government's proposal - which would come into force mostly next year - would raise taxes paid by people and businesses including changes to sales tax and eliminating exemptions and deductions.

The plan looks to boost the country's tax income by 2% of gross domestic product (GDP). Colombia has increased its debt levels substantially to address needs connected to the coronavirus pandemic.

If the proposal fails to pass, Colombia could lose its investment grade, causing financial problems for the government and businesses, Zarate said in an interview late on Tuesday.

"It could lead to things we consider inconvenient, such as a more drastic adjustment in spending that could affect public investment," Zarate said.

The bill, which was sent to congress last week, has been rejected by lawmakers, unions and business associations, who say it would dent peoples' pockets at a time of high unemployment and economic downturn. Colombia's GDP contracted 6.8% last year.

Withdrawing the proposal could lead to doubts about the sustainability of Colombia's public debt and cause economic instability, Zarate said.

"There could be reasonable doubts about Colombia's capacity to honor its debt and that, obviously, will affect our capacity to finance not only the public sector, but also the private sector," Zarate added.

The government needs new resources equivalent to at least 1.5% of annual GDP if it is to guarantee fiscal sustainability, Zarate said. If the proposal is approved, Colombia's fiscal deficit would fall to 5% of GDP in 2022, down from the forecast 9.1% of GDP for this year, Zarate added.

Certain elements of the plan could cause inflationary pressures, but would not exceed the central bank's targeted 3%, Zarate said.

"Now's the time to do it, because right now inflation is way below the bank's target," Zarate added. (Reporting by Nelson Bocanegra and Carlos Vargas; Writing by Oliver Griffin; Editing by Will Dunham)