Government presents rescue law: a tax with payroll cut

The Colombian government formally presented its Economic Rescue Law to Congress on Wednesday, submitting a legislative package designed to correct the nation’s fiscal imbalance through a combination of tax increases and drastic public spending cuts. The proposal aims to reduce the primary deficit from its current level of 3.2 percent of GDP to 2.1 percent by 2027, further lowering it to 0.3 percent in 2028. The plan targets a budget surplus ranging between 0.1 and 0.5 percent of GDP for the years 2029 and 2030. Under this trajectory, net debt would stabilize at 64.2 percent of GDP. Finance Minister Miguel Gomez Martinez stated that the project fulfills his campaign promise of a 70.2 trillion peso adjustment, equivalent to 4.1 percent of GDP, though the measures will be implemented gradually over four years. Approximately 70 percent of the savings will derive from expenditure reductions, while the remaining 30 percent will come from new taxes and changes to the social security system. A central component of the 103-article bill, detailed in a 123-page document, grants President Abelardo De La Espriela extraordinary powers for six months to restructure the executive branch. These faculties allow the president to suppress, merge, or split ministries, administrative departments, superintendencies, agencies, special administrative units, and public establishments without requiring congressional approval. The administration can also alter the legal nature of these entities. The law mandates that personnel cuts begin with directorial positions, advisory roles, vacancies, and temporary jobs, ensuring total costs do not exceed previous levels. By 2028, the cost of permanent staff within the Executive Branch, excluding the Public Force, must decrease by 20 percent in nominal terms. Salary increases for public officials are capped at the Consumer Price Index plus 0.5 points, a measure projected to save 9.6 trillion pesos in 2028. The legislation also imposes strict limits on operational expenses. Spending on service provision contracts must be halved by 2027 compared to 2025 levels, yielding annual savings of approximately 3.2 trillion pesos. State purchases between 2027 and 2030 cannot grow faster than inflation. Additionally, the government plans to sell non-productive assets through the state-owned enterprise CISA, ban non-essential official advertising, and require all entities to submit austerity plans every six months. Specific restrictions include limits on travel, per diems, and official celebrations. On the revenue side, the tax measures largely mirror the fourth tax reform proposed during the previous administration under President Gustavo Petro. According to Vice President Jose Manuel Restrepo, 73 percent of the tax articles are identical to those previously submitted, while another 23 percent contain similar measures with adjusted values. The design intends for the top 10 percent of households by income to bear 97 percent of the direct tax effort. A key mechanism involves raising the Value Added Tax rate to the standard 19 percent for goods and services currently enjoying exemptions, including hybrid and electric vehicles, digital platforms, software licenses, and online betting. To offset this increase for lower-income groups, the program EfectIVA would refund part of the VAT paid by 35.2 million individuals in the bottom six income deciles, representing 68 percent of the population. Eligibility is determined via the unified income registry and the SISBEN poverty index. The poorest 30 percent would receive a 100 percent refund, while others would receive refunds between 50 and 30 percent based on electronic invoicing data. This system is expected to generate average annual net VAT collections of 25.5 trillion pesos. Excise taxes on so-called vice products are also increased. Beer would face a 10 percent ad valorem component, while spirits would pay 35 percent, plus 1,000 pesos per liter for each degree of alcohol content. Cigarettes would incur a tax of 11,200 pesos per pack, and e-cigarettes would be taxed at 2,000 pesos per milliliter. All these rates would adjust annually according to the CPI plus four points. At full implementation, beer would contribute 7.1 trillion pesos, spirits 2.1 trillion pesos, and tobacco 1.4 trillion pesos annually. The bill also seeks to impose income tax obligations on middle-class earners, a move described as unpopular but recommended by economic advisors. Critics have raised concerns regarding transparency and political communication surrounding the fiscal crisis. Maria Camila Gonzalez Olarte, co-founder of the organization Economia para la Pipol, noted that public accounts remain difficult for citizens to understand despite repeated tax reforms and decree budgets in recent governments. She highlighted that the approved budget exceeded analyst expectations, yet the government has already announced cuts worth 13.8 trillion pesos affecting infrastructure, social programs, contractors, and debt payments. Gonzalez Olarte pointed out that the 2027 budget was issued by decree due to procedural flaws in Congress, which resulted in the loss of a clause requiring quarterly government reports on off-budget funds, such as the Milagro Fund for earthquake reconstruction. Furthermore, she criticized the current administration’s communication policy, which requires ministers to seek permission before speaking to the press and prohibits journalists from approaching them after public interventions. Similar restrictions were observed during the Petro administration, which centralized government messaging. These barriers hinder journalistic oversight and make it harder for citizens to track how public money affects their finances. The presentation of the rescue law follows a month of waiting for the government to detail its fiscal correction strategy. While the previous administration promised to avoid tax hikes in favor of spending cuts, the reality of high debt, expensive interest rates, optimistic revenue forecasts, and excessive spending forced a pivot toward taxation. The new government faces the task of implementing these deep structural changes while managing political resistance. The extraordinary powers granted to the president aim to streamline the bureaucracy quickly, eliminating duplicate functions and centralizing administrative support services like human resources and legal management into single entities. The success of the plan depends on whether Congress approves the broad framework for state reduction and the specific tax adjustments intended to balance the books by the end of the decade.