The “miracle” bill
President Abelardo de la Espriela’s new Economic Rescue Bill (ERB) is an all-encompassing and ambitious proposal (“miraculous” according to the government) that, besides rhyming with the “patria milagro” (miracle fatherland), a slogan of his administration, aims to generate a primary balance improvement of more than 4 ppts of GDP by 2030. That would indeed be nothing short of a miracle.
One of the largest fiscal problems inherited from the Gustavo Petro administration is the underfunding of healthcare. The cost of universal coverage has increased far more than the sources created to pay for it. To prevent the system from collapsing, the ERB proposes substantial tax changes. It would eliminate the 5% VAT on some goods and services, moving most items to the 19% general rate. Some previously untaxed or excluded items will also become subject to the 19% VAT. To insulate low (and some middle) income households from the effects of such hikes, the government proposes to strengthen the current VAT rebate system.
Multiple assessments of the shortcomings of the Colombian Tax Code have pointed to VAT and personal income tax as the two largest problems. There are leaks in the VAT system and, on the income tax front, (i) a narrow base (ii) unusually high income levels above which taxes must be filed, and (iii) a poorly-designed and excessively generous system of marginal rates. But previous administrations have found an impenetrable political wall blocking most efforts to change this. Other than bringing the general VAT rate to 19%, the 2016 tax reform fell short of fixing the above problems. The 2019 tax reform plan suffered a similar fate. A tax reform initiative submitted to Congress in 2021, designed to finally tackle most of these problems, generated nationwide protests, was killed in Congress and resulted in the sacking of then-Finance Minister Alberto Carrasquilla.
If approved as proposed, the ERB should yield improvements in the primary balance of 2.4% of GDP in 2027, 3.6% in 2028, 3.9% in 2029 and 4.1% in 2030. That could have significant distributive and poverty-reduction effects. According to an analysis carried out by Jairo Núñez, if the EfectIVA rebate works, the household resources of the three lowest per-capita spending deciles would increase by more than 2%, while the top four deciles would suffer a more than 3% hit.
The Finance Ministry projects that the adjustment strategy should change Colombia’s fiscal scenario over the next decade. Instead of the primary deficit deteriorating to around 4.5% of GDP, and net debt to embark on an explosive path ending in 150% of GDP, the strategy should generate a primary surplus of 0.6% of GDP, stabilizing net debt at 64.2% of GDP. Net debt would nonetheless not converge to 55% (the fiscal rule anchor) over the next 10 years. The Ministry says that will be achieved only in the event of higher GDP growth, and future reforms.
But time is short to execute this plan, or an inevitable compromise. Congress will only be in session until December 16 or, if the government succeeds in calling for special sessions, until December 31 at the latest -- and the bill must be approved this year if the government wants it to take effect in 2027, which of course it does.
One could argue that the odds of its passage are very favorable, since the government coalition holds 60%–70% of the seats in both chambers. We are confident that the bill will be approved – but probably in a significantly different form. The opposition has of course stated that it will vote against the whole bill. In fact, it would not be surprising if it tried to delay the process, and we’d thus come to yearend with the bill stalled in endless public fora, expert discussions and political control debates. The government will have to show a lot of skill to cement the passage of a bill this year.
We estimated that the approved fiscal adjustment will amount to around 1.5% of GDP, in the most positive scenario. For the later years, around 2%–2.5% of GDP would be a good outcome. The government will likely have to obtain an additional point of GDP through the National Development Plan and other administrative measures. We don’t expect the proposal to fail entirely. It’s not an exaggeration to say that a great part of Colombia’s economic recovery depends upon the approval of this initiative – and we hope that Congress will understand its fundamental importance.
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