The Government of Colombia is pushing a new version of what it calls the Financing Law — a fiscal reform aimed at securing resources for the 2026 budget — in a context of deteriorated public finances and growing social needs.
Presented before Congress, the proposal seeks to generate 26.3 trillion pesos — approximately US$6.5 billion — through a comprehensive package: Expanding the VAT base, adjustments to the income tax, eliminating or reducing exemptions and tax benefits, environmental taxes, and fiscal measures targeting high-income sectors.
The official argument says that these resources are necessary to cover a state budget of nearly 557 trillion pesos (approximately US$145 billion) for 2026, and thus avoid an unsustainable deficit.
However, for now the agreement reached a few weeks ago to approve the budget does not appear to be replicating itself in Congress to secure a fiscal law that the government has labeled as essential and that the opposition views with suspicion. Although it was initially stated that approval of next year’s budget was tied to subsequent approval of tax reform, political consensus has been lost and, after more than a month, seems further away than ever.
Critical days ahead for Colombia’s Government tax reform
Faced with resistance from various political and social sectors, the executive introduced modifications — especially in the VAT component — hoping to reduce pushback and achieve the same consensus that, after arduous negotiations, was reached for the approval of the 2026 general budget.
This was recently acknowledged by the Ministry of Finance, which indicated that the new changes would focus on taxing hybrid vehicles with a greater combustion component, opening a “favorable outlook” to resume debate and negotiate support in congressional committees.
According to its promoters, the reform seeks not only to raise more revenue, but also to combat tax evasion, eliminate excessive benefits for privileged sectors, and move toward a more equitable and sustainable tax system.
Despite the amendments and efforts to bridge differences, approval of the Financing Law today seems unlikely. Numerous lawmakers have expressed reservations, particularly due to the implications of increasing the tax burden amid a fragile economic context. Productive sectors and businesses — they warn — could be hit by increases in taxes on consumption, wealth, or certain goods.
The legislative process has suffered delays and even signs of the bill being shelved in key committees — something many interpret as a “chronicle of a death foretold,” despite Interior Minister Armando Benedetti asserting earlier today that the chances of the controversial law being approved “are still intact.”
The government’s latest proposal for the fiscal reform
Last week, after the debate on the tax reform was postponed, the Government convened sponsors and coordinators of Congress’s Economic Committees to seek a “grand political agreement.” During that meeting, Finance Minister German Avila proposed a series of modifications aimed at softening the reform and facilitating its approval.
Among the most relevant changes, the Government withdrew all measures related to taxes on fossil fuels — one of the most controversial elements of the initial proposal. It also drastically reduced the revenue estimate from tobacco and beer taxes: The figure fell from a projected 7.8 trillion pesos (approximately US$2 billion) to just 3.1 trillion (approximately US$815 million). Additionally, it eliminated the designation of a ticket-sales tax, which had been part of the original proposal.
Regarding VAT, the adjusted version introduces changes for hybrid vehicles, although the government will now consider focusing the measure only on those with a greater combustion component. The final scope is still undefined. However, the principle of progressivity in the income tax — meaning that those with higher incomes contribute more — remains a central pillar of the reform.
With these changes, the new version of the bill submitted to Congress aims to raise about 16.3 trillion pesos (approximately US$4 billion) — a lower figure than the original estimate of 26.3 trillion (approximately US$6.5 billion) — to complete the budgetary framework for the 2026 nation’s general budget.
Taken together, the adjustments reflect a shift: They softened the most controversial aspects of the reform (fuel, tobacco/beer taxes, ticket sales) with the aim of building consensus, without completely abandoning the goal of increasing revenue and advancing greater fiscal progressivity.
President Petro’s warnings about a possible default
The increase in the deficit in recent years — widened by the recent suspension of the fiscal rule in place since 2011 — has worsened the country’s credit rating, raising the cost of debt and limiting the state’s room to maneuver.
Against this backdrop, the country’s president, Gustavo Petro, delivered a stark message yesterday: During the Cabinet meeting he warned that, if the Financing Law is not approved soon, Colombia could fall into default. The president stressed that without the additional resources envisioned, the national economy would face a risk of insolvency that would compromise the state’s ability to meet its obligations.
In this regard, Petro again placed blame for the swollen debt on his predecessor, President Ivan Duque, whom he has previously accused of — according to him — taking out loans at very high interest rates from international funds during the COVID-19 pandemic.
“If Congress acts responsibly, given that we are only taxing the richest, no one else, the megarich, then we solve the problem and the cost of the debt would fall, and we would balance the damage left by paying in three years 70 trillion pesos (approximately US$18 billion), which appear as expenditures in the budgets but do not appear as revenues,” the president said during Tuesday’s Cabinet meeting, Nov. 25.
The political arithmetic in Congress, however, appears to be tying the government’s hands. Resistance to new taxes amid inflation and global economic uncertainty, combined with insufficient support from key parties, reduces the chances of the bill moving forward, pending a last-minute plot twist from the government that could change the path toward rejection, which today seems all but inevitable.