Colombia is nearing a historic fiscal deficit as President Gustavo Petro presses lawmakers to approve a stalled tax-and-financing package he says is essential to avert a sovereign default, economists and former officials warned Tuesday.
The government says the fiscal gap has widened sharply in recent years, from a deficit equal to 4.2% of gross domestic product, or GDP, in 2023 to 6.7% in 2024, as public spending jumped from about 18.7% of GDP in 2019 to roughly 24% this year. Finance Ministry officials have told lawmakers the state must refinance about 16 trillion pesos (about US$4.2 billion) for the 2026 budget and that, without new revenues in the pending Financing Law, the imbalance could swell toward 8% of GDP.
The administration has proposed a sweeping Financing Law, originally estimated to raise 26.3 trillion pesos (about US$6.5 billion) and since pared back to roughly 16.3 trillion pesos (about US$4 billion), combining VAT-based expansion, changes to income tax progressivity, and other measures. After months of negotiation, key provisions were softened or removed, including controversial levies on fuels, tobacco, and event tickets, as the government sought to coax reluctant congressional votes.
Petro has said he will tax the rich to solve Colombia’s fiscal deficit
Petro has repeatedly warned lawmakers that failure to pass the reform would imperil Colombia’s ability to pay its debts. “If Congress acts responsibly, given that we are only taxing the richest … then we solve the problem,” the president said at a recent cabinet meeting, according to government accounts and local media reports. He has said the alternative could be insolvency.
Independent monitors and economists say the warning is rooted in hard numbers. The tax authority, DIAN, has acknowledged a shortfall in collections this year of 11 trillion pesos, a gap the government has been filling with more borrowing. Public debt now stands at about 65% of GDP, the highest in the country’s contemporary history, and interest costs have surged: Average borrowing rates on recent issuances topped 11.2%, making Colombia’s funding among the most expensive in the region. One estimate cited by fiscal watchdogs says roughly one in every three pesos collected in taxes goes to pay interest on the debt.
“The state has rigid spending commitments, health, pensions, and transfers, that are misaligned with its capacity to collect,” said Marcela Eslava, an economist at Universidad de los Andes, to El Pais. “This is a chronic disease in the advanced stage. We need deep surgery in public spending; otherwise, the hole will keep widening.”
Former finance minister Echeverry faulted many factors for Colombia’s current financial woes
Former finance minister Juan Carlos Echeverry faulted what he described as a string of policy errors that inflated the deficit, ranging from the advance taxation of future revenues to overly optimistic collection targets. “There has been a succession of four irresponsible choices,” he said, citing anticipatory revenue accounting and unmet litigation gains the government had assumed would shore up the budget.
The International Monetary Fund has urged “a decisive and credible fiscal adjustment,” recommending immediate cuts equal to 0.5% of GDP and deeper structural reductions of more than 3 percentage points of GDP between 2026 and 2028 to return the debt path to sustainability. Analysts at Fedesarrollo have proposed practical steps, including widening the tax base, trimming poorly targeted subsidies such as diesel support, and re-anchoring the fiscal rule to restore credibility and attract investment.
To limit near-term funding pressure, the Treasury has carried out active debt management operations, including issuance of €2 billion (US$2.3 billion) in global bonds and large buybacks of U.S. dollar securities, intended to lower interest costs and reduce dollar exposure. The Comite Autonomo de la Regla Fiscal (CARF) said those maneuvers help explain a slightly lower projected deficit for 2025, which is about 6.2% of GDP in its latest estimate, but warned the structural fiscal gap remains deep.
Colombia’s fiscal credibility is eroding
International investors are watching. Carlos de Sousa, an investment strategist at Swiss manager Vontobel, said Colombia’s combination of high deficit, rising public spending, and a high-rate environment is eroding fiscal credibility. “Without meaningful adjustment, Colombia will pay more to borrow,” he said. Higher borrowing costs would, in turn, compound the deficit by increasing interest payments.
The political calculus in Congress is delicate. Lawmakers from both opposition and some allied blocs have balked at tax increases amid a fragile recovery and stubborn inflation. The government has revised the bill to try to reduce political friction, for instance, narrowing VAT changes to hybrid vehicles with significant combustion engines, but several committees have delayed debate and votes, prompting officials to seek a last-minute “grand political agreement.”
Finance Ministry officials argue the proposed package is progressive and targets the wealthy; critics say the measures are insufficient or risk stifling growth. “This cannot be fixed in a year,” said Echeverry. “It will require four to six years of deep reforms, even if done correctly.” For now, Colombia lives with elevated risk. Rating agencies have downgraded Colombia in the past year, and fiscal experts warn that without a credible, legally anchored plan to restrain mandatory spending and broaden revenues, debt could climb toward 70% of GDP in the coming years, a threshold CARF says would put the public finances on an unsustainable trajectory.