With this decision, the Ministry of Finance, led by recently appointed Diego Guevara, will need to adjust the funding available for the Colombian government’s operations in 2025. The reform had been drafted by former Minister Ricardo Bonilla, who resigned earlier this month following a corruption scandal involving another entity from the government.

A predictable consensus?

The defeat was secured with votes from the right-wing opposition parties, independent parties (including the Liberal and Conservative parties, both of which had previously expressed their discontent through official statements), and some members of the Green Party, despite its partial alignment with the government. Only the left-wing parties in the governing coalition supported the bill.

Congressmen Miguel Uribe and Christian Garcés, who presented their arguments against  the bill, pointed out that the reform was inconvenient and asserted that it further affected an economy that is not going through its best moments. 

“The tax reform is not convenient, it is designed to discourage business formalization, increase the tax burden on individuals, erode investment and savings,” Uribe argued.

Other strong arguments were the low execution rate of the current budget —according to Dapper, as of November 2024 the budget execution rate was the lowest since 2019— and the potential consequences of eliminating the Simplified Tax Regime (RST), which the reform had proposed. Introduced to boost business and labor formalization in Colombia, the RST simplified taxation for small businesses by basing it on gross income rather than net profit.

Luis Fernando Mejía, CEO of the Colombian think tank Fedesarrollo, voiced his concerns about the viability of the project on Twitter/X just hours before the proposal was rejected. 

Mejía criticized measures such as tripling the carbon tax, due to its negative impact on the productive sector, and also warned that the reform would introduce a “minimum presumptive dividend,” a concept that could lead to double taxation on 30% of corporate profits, creating uncertainty and further discouraging investment. Also, he suspects “presumed minimum dividend” could result in double taxation on 30% of corporate profits, potentially creating uncertainty and further discouraging investment.

Earlier this year, president of AmCham Colombia Maria Claudia Lacouture also expressed her concern with the bill in an interview with La República, pointing that “In the current context of economic slowdown, with multiple pressures keeping growth below 1.2%, the best tax reform would be austerity and public spending execution, combined with strategies to foster investment, build trust, and create certainty. This approach could not only generate short-term investment but also attract foreign investment to the country.”

Petro’s administration to face the consequences — and the year to come

Government officials who attempted to save the reform at the Congress expressed their disappointment at this failure. President Gustavo Petro, through his Twitter/X account, offered hints about the government’s future tax policies, stating: “The budget crisis will not be paid for by the people,” meaning that social programs would remain unaffected, and added: “The fight against tax evasion, starting with online gambling and smuggling, must become a central priority.” 

Additionally, with discussions on the labor reform bill proposed by Petro’s government postponed until 2025, Petro suggested that this delay “must be compensated by [a significant increase in] the minimum wage.”

Finance Minister Diego Guevara, according to El Tiempo, described the death of the tax form bill as more than just a ‘fist’ to President Petro, stating: “This is a vote against the regions, a vote against investment,” meaning it is as a setback for regional investment in Colombia and development projects.

The coming year, 2025, will be the last before the 2026 presidential election to determine Gustavo Petro’s successor. In this context, the 2025 budget will now be established via a decree, adjusted to exclude the revenue the failed reform sought to generate.

Headline Photo: Capitolio Nacional (Photo: Oficina de Información y Prensa Cámara de Representantes)

While still significantly higher than the 1.6% growth that the Medellín-based bank estimates Colombia experienced in 2017, this is below the 3.0% projected by the International Monetary Fund (IMF) and the 2.9% forecast by the World Bank. Even the more pessimistic Colombian central bank (Banco de la República) has set its expectations at 2.7% growth this year.

“We expect the manufacturing industry and retail to gain traction in 2018 … Construction would return to positive territory driven by civil works. Mining would be favored by the good moment of global growth.“ – Bancolombia

Regardless of the disparity, in its analysis, Bancolombia has highlighted the positive factors that will lead to improvements this year, including higher commodities prices, improved household consumption, and a more balanced economic growth across various sectors.

“We expect the manufacturing industry and retail to gain traction in 2018,” wrote Bancolombia in its analysis. “Retail would go from growing 0.7% in 2017 to 2.3% in 2018. Construction would return to positive territory driven by civil works. Mining would be favored by the good moment of global growth.“

Bancolombia also projects household consumption to jump from 1.6% growth in 2017 to 2.6% in the year ahead, while unemployment will average 10.9% and the currency exchange rate will average 2,935 pesos to the U.S. dollar.

Higher oil prices will be a large factor in driving recovery. Bancolombia predicts that the per-barrel price of oil will average $57 USD in 2018, up by more than $6 USD from its prior expectations. Though “volatility will remain high” the bank says that “the good performance of the developed economies and the foreseeable reduction in inventories will allow prices to be maintained in the short term.”

These, and other factors — including higher-than-expected oil prices, more private investment, increased exports and a faster recovery in construction — have also led Bancolombia to set its most-optimistic outlook for GDP growth at 3.3%. While this is balanced on the low end by a worst-case possibility of 2.1%, Colombia’s largest bank believes that the second half of the year, after the congressional and presidential elections are complete, will show better results than the initial six months of 2018.

Capital Economics Forecast: 2.5% Growth

One other analyst group that agrees with Bancolombia is the London-based Capital Economics. In an analysis released this week, it projected the same 2.5% GDP growth for Colombia in 2018.

The research firm cites also higher oil prices — predicting the per-barrel price to be 5% above the 2017 average — as a key factor that will drive growth this year. Better returns will lead to more investment from the sector as well as increased output, according to Capital Economics.

Amid the recovery, the organization also sees lower inflation and interest rates spurring more consumer spending and better credit conditions. Moreover, the government is likely to take a less severe stance regarding the austerity plan it has been operating under for in recent years.

READ MORE: IMF Projects Colombian GDP to Grow by 3.0% in 2018

“The budget deficit narrowed from a peak of over 4% of GDP in 2016 to 3% of GDP last year as the government reined in spending and hiked the VAT rate,” stated Capital Economics. “While the government’s 2018 budget envisages another year of fiscal austerity, the size of this year’s fiscal squeeze (equivalent to 0.5% of GDP) will be smaller than last year’s (about 1% of GDP).”

And in the eyes of Capital Economics, this will be the case regardless of who takes over as president in the mid-year election. While the leading candidates have conflicting campaign positions on key economic policy areas, the differences are unlikely to prove material in terms of the nation’s overall trajectory.

“Ultimately, we do not think any would mark a significant departure from Colombia’s relatively market-friendly economic policies,” stated Capital Economics.

Photo: Bancolombia headquarters in Medellín, Colombia. (Credit: Juan Camilo Trujillo)