Paula Garda
OECD
Michael Koelle
OECD
OECD Economic Surveys: Colombia 2024
OECD Economic Surveys: Colombia
Abstract
After a strong recovery, GDP growth has slowed down on the back of tighter monetary and fiscal policies and weakened investment. Inflation has decelerated but remains high. Immediate macroeconomic priorities include continuing to reduce inflation and fostering an investment-friendly environment. Fiscal prudence is required to address various fiscal risks and ensure compliance with the fiscal rule. To meet growing government spending needs – including the government’s ambitious social and productive transformation reform agenda – broad reforms to raise spending efficiency and increase tax revenues will be needed.
2.1.1. Low investment is dragging down growth
After one of the strongest rebounds among OECD countries from the COVID-19 crisis with GDP growing by 10.8% and 7.3% in 2021 and 2022, respectively (Figure 2.1, Panel A), growth moderated sharply to 0.6% in 2023 on the back of tight macroeconomic policies, slowing global growth, and higher global borrowing costs. The strong recovery above pre-pandemic trends was driven by a boom in consumption especially of durable consumer goods, driven by accumulated savings during the pandemic, a significant increase in consumer credit, a strong labour market and minimum wage hikes. Accommodative fiscal and monetary policies also played a significant role in the recovery. Domestic demand growth started to level off in late 2022 as private consumption moderated, and weak investment added to sluggish growth in 2023. Economic activity started to rebound in 2024, with GDP growing by 1.7% in the first semester of 2024 with respect to the semester before, driven by private consumption growth. Investment started increasing in the second quarter of 2024, particularly in infrastructure. However, GDP grew only 0.1% in the second quarter of 2024 with respect to the quarter before. Headline inflation peaked in March 2023 at 13.3% and declined to 6.1% by August 2024. The disinflationary process was slower than in other countries due to a strong rise in energy prices, driven by the exemplary removal of petrol subsidies by end-2023, stronger domestic demand in 2021-2022, significant increases in the minimum wage, widespread price indexation mechanisms, a sharp depreciation of the Colombian peso in 2021 and 2022, and strong hikes in food prices due to supply constraints.
Note: In panel A, 2019 refers to annual data, and the pre-pandemic trend is defined as the 2019 quarterly average growth rate.
Source: OECD calculations based on the OECD Economic Outlook (database).
Colombia has experienced a long-lasting decline in total investment since the end of the commodity boom in 2015 (Figure 2.2, Panel A). The low and declining investment-to-GDP ratio since then hinders the already low potential growth and ability to catch up in productivity and living standards with more advanced economies. Several drivers could have contributed to the declining investment rate, including a low savings rate and misallocation of capital. High informality might be another driver contributing to Colombia's low potential growth, low national savings rates, and inefficient capital allocation, as firms and workers in the informal sector often face precarious employment conditions, low wages, and lack of access to formal financial institutions limiting their ability to save and invest in productive activities. Moreover, investment in science, technology, and innovation has remained relatively low, at around 0.5% of GDP, which may hinder economic diversification and higher value-added investments.
Before the pandemic, the investment-to-GDP ratio stood at around 23%, in line with the OECD average (Figure 2.1, Panel B and Figure 2.2, Panel A), but has since plummeted to one of the lowest among OECD countries, 17.8% in 2023. To achieve a potential growth rate of around 3%, an investment rate of at least 20% of GDP is required (Fedesarrollo, 2024[1]). Gross fixed capital formation grew by 3.8% in the first semester of 2024 compared to the previous semester, but investment remains weak, with both public and private investment underperforming. A particular concern is civil works investment (Figure 2.2, Panel B) which has fallen to a little more than half of the pre-pandemic level. The government has launched new initiatives to encourage investment in infrastructure (particularly in railways, airports and roads), but public investment is hindered by the low execution capacity of many local governments.
Note: In Panel C, for the confidence index, values higher than 0 represent an optimistic view, whereas values lower than or equal to 0 represent a pessimistic view. In Panel D, the data represents 3-month moving averages and incorporates the domestic press coverage. LAC is a simple average of Argentina, Brazil, Chile, Mexico, and Peru.
Source: OECD Economic Outlook (database); OECD calculations based on DANE quarterly National Accounts; Banco de la República; Fedesarrollo; and Banco de España.
During 2023, private investment slowed down driven by high credit costs, stricter lending criteria on the back of tighter monetary policy and low business confidence, (Figure 2.2, Panel C). Other drivers affecting investment are the rising costs of construction materials, such as steel, cement, asphalt, and concrete, global supply chain disruptions caused by the pandemic and the war in Ukraine that further exacerbated these issues. The 2021 and 2022 corporate tax increases might have also impacted private investment. Uncertainty (Figure 2.2, Panel D) regarding the pace and implementation of reforms might have also hindered private investment. Delays in private infrastructure investments stemmed from a slow adoption of the new generation of the public-private partnerships portfolio (‘5G’), following the near-complete execution of the 4G projects. Lower-than-agreed annual road toll increases could have increased uncertainty, potentially disincentivising private involvement in infrastructure PPPs. The transition to better-targeted housing subsidies, while welcome, may have negatively impacted investment in the construction sector. Difficulties in securing land rights, environmental licenses, and necessary prior consultations with ethnic communities might have also explained delays in investment. On the upside, four ‘5G’ infrastructure projects will soon start to be implemented and record-high Foreign Direct Investment influx of USD 17 billion in 2023 signals foreign investor confidence in Colombia.
The current account deficit has significantly narrowed from high levels in 2022. The strong growth in 2022 driven by durable consumer goods fuelled import growth and widened the current account deficit, amid favourable terms of trade. In 2023, all components of the balance of payments contributed to correcting the external imbalance (Figure 2.3, Panel A), with the trade deficit in goods showing the most significant improvement due to reduced imports amid lower domestic demand. Despite increased interest payments on external loans, net outflows from factor income decreased, from 2022 high levels, mainly because of lower profits from foreign direct investment, driven by lower oil and coal prices. Additionally, higher remittances, equivalent to 2.8% of GDP, mainly from the United States and Spain, helped reduce the current account deficit. Foreign direct investment (FDI) has reached a record high of 5% of GDP and remains the primary source of external financing (Figure 2.3, Panel B), helping to more than compensate for net portfolio outflows, mainly from residents increasing their assets abroad. In 2023, the Colombian peso appreciated by approximately 21% year-over-year against the USD in nominal terms (end-of-period), following a depreciation of 20% in 2022, correcting some of the overshooting of the previous year. This significant appreciation, one of the largest among emerging markets, was in addition driven by improvements in Colombia's fiscal and external positions.
Source: Banco de la República; and OECD calculations based on the OECD Economic Outlook (database).
2.1.2. The labour market performed strongly but has shown signs of slowing down
The labour market has been resilient and is nearing full post-pandemic recovery, with robust job creation and reduced informality rates, but recent data suggest a slowdown. Employment growth surged in 2022 in line with strong economic growth, especially among 24-54 years old and small firms, and remained dynamic throughout 2023 but has slowed since September 2023 in line with the slowdown in economic activity. Labour force participation and employment rates are close to pre-pandemic levels (Figure 2.4, panel A), but, among the youngest (up to 24 years) employment remains below pre-pandemic levels. The unemployment gender gap narrowed in 2023 as female employment has grown faster than male employment (Figure 2.4, panel B), mainly due to job creation in artistic activities, the services sector, and public employment, the primary sources of female employment. In 2023, real labour income of salaried workers rose by 5%, primarily due to the nominal minimum wage hike of 16% (Banco de la República, 2024[2]). After bottoming out in August 2023 at 9.5%, the unemployment rate increased to 10.7% in December 2023 and remained around this level until July when reached 10%, similar to the 2015-2019 average, but above the OECD average of 5%. The informality rate was 56% in June, like a year earlier, but it has increased slightly in recent months, which might be driven by the slowdown in economic activity and the impact of large minimum wage hikes.
Source: OECD calculations based on DANE; and CEIC.
2.1.3. Economic growth will return to low potential growth
GDP growth will experience another year of relatively modest growth, reaching 1.8% in 2024, before picking up to 2.8% in 2025 (Table 2.1), returning to a low potential growth. Private consumption growth will remain moderate but solid supported by disinflation, monetary policy easing and significant remittances. Exports will grow moderately given the still weak external demand and lower oil prices. Investment will gradually continue its increase in line with the easing of domestic and external financial conditions that will allow for a partial rebound in private investment, and accelerate in 2025, when real interest rates fall back to levels seen in the previous decade. Civil works investment is expected to continue to rebound with the implementation of newly adjudicated public-private partnerships. Inflation will continue falling and converge close to the 3% target by end of 2025. The current account deficit will remain just below 3%, below pre-pandemic levels. Unemployment will stabilise in 2024 and then slightly fall in 2025.
1. Contributions to changes in real GDP, actual amount in the first column.
2. Consumer price index excluding food, regulated utilities, and fuel prices.
3. Based on national employment survey.
4. The fiscal balance shows the central government budget.
Source: OECD STEP 115 database.
2.1.4. Risks around the outlook remain substantial
Risks and uncertainties remain elevated (Table 2.2). Externally, geopolitical tensions could lead to global recession and may trigger greater risk aversion and increase financing costs and foreign exchange market volatility. Lower-than-expected growth in the United States, the main trading partner as highlighted in Chapter 3, could weaken growth, worsen the terms of trade and lower exports, widening the current account deficit. Upside risks to growth include sustained higher commodity prices, faster global growth and a faster than anticipated recovery of the United States economy. The rising trend of nearshoring, which has heightened foreign investors' attraction to Latin America, may also result in increased foreign direct investment and output growth.
External gross debt at 60% of GDP has significantly risen since 2010s (Figure 2.5, Panel A), is higher than other countries in the region and a significant share of Colombian sovereign debt is denominated in foreign currency, mostly USD, increasing vulnerability to global financial conditions and exchange rate fluctuations. Furthermore, a weaker fiscal outcome could lead to a higher external deficit. Twin deficits are a concern because they can lead to increased public debt, vulnerability to external shocks, and potential downgrades in credit ratings. These risks are mitigated by comfortable foreign exchange currency reserves (Figure 2.5, Panel B), a resilient financial sector, a current account deficit that is largely supported by foreign direct investment (see Figure 2.3, panel B above), and a flexible exchange rate. These buffers are complemented by a two-year Flexible Credit Line arrangement with the IMF.
Source: IMF International Financial Statistics (database); and IMF World Economic Outlook (database).
Domestically, more persistent inflation may require keeping high interest rates for an extended period. Weaker than expected private demand resulting from tighter financial conditions, or a weakened labour market also presents potential risks to economic growth. Failure to accelerate public works and PPP infrastructure investments may perpetuate subdued investment levels. The risk of heightened social tensions and increased violence cannot be ruled out and could disrupt economic activity. On the upside, a faster-than-expected implementation of the ongoing reindustrialisation policy could boost investment faster than anticipated.
Risk perceptions have moderated, after peaking in 2022, but remain elevated compared to pre-pandemic levels and those of countries with similar credit ratings (Figure 2.6). Persistent uncertainty can increase borrowing costs and worsen the debt outlook, as evidenced by Colombia losing its investment grade in 2021 and Standard and Poor’s recent shift in outlook to negative in January 2024. The latter change highlights concerns about long-term investor confidence, which may hinder private investment (S&P, 2024[3]). Uncertainties regarding the implementation of and funding for reforms, along with implementation and regulatory challenges, may elevate borrowing costs, prompt capital outflows causing currency depreciation and inflationary pressures, and hinder private investment.
Colombia is highly vulnerable to climate change facing risks such as extreme weather events, rising temperatures, changing precipitation patterns, and natural disasters like floods and landslides (see chapte 5). El Niño and La Niña, climate phenomena characterised by the changes in sea surface temperatures that cause draughts or heavy rainfall, are becoming more frequent and intense due to climate change. These natural hazards pose significant threats to ecosystems, water resources, infrastructure, and human health and well-being, exacerbating risks to economic activity and the inflation outlook, particularly in climate-sensitive sectors like agriculture and tourism. As Colombia's energy supply relies heavily on hydropower, natural hazards such as El Niño can lead to disruptions in electricity supply and increases in energy prices. As fossil fuel producer, Colombia is highly exposed to changes in oil prices, as 40% of its exports and 5% of its tax revenues come from oil. A sharper-than expected decline in long-term oil prices due to an accelerated global transition to clean energy poses a risk if the economy fails to diversify at a similar pace. Other risks include social and economic dislocation resulting from the phasing out of traditional energy sources such as oil extraction and coal mining. Job losses in these sectors could lead to increased unemployment and social tensions, while the shift to clean energy infrastructure requires substantial investment and technological upgrades, posing financial and logistical challenges for the government and private sector.
Note: In Panel A, data refer to JP Morgan EMBI spreads.
Source: OECD Economic Outlook (database); and LSEG.
A tight monetary policy stance, with ex-ante real interest rates at 6.7% in July after peaking in February at 7.6%, has contributed to the decline in inflation from its peak of 13.3% in March 2023 to 6.1% in August 2024 (Figure 2.7, panel A). Disinflation occurred despite significant increases in energy prices, especially petrol, driven by the welcome phase-out of distortive subsidies, and two strong minimum wage increases of 16% in 2023 and 12% in 2024. During 2023 inflation of goods prices decreased substantially due to the peso appreciation, while service price inflation has shown persistence due to the high degree of price indexation. Price indexation – either to past inflation or to minimum wage increases – affects 60% of the consumption basket on which the consumer price index is based (Banco de la República, 2023[4]). Indexation, coupled with high increases of the minimum wage, rising fuel prices, and strong domestic demand, could explain the slower pace of disinflation compared to countries like Brazil or Chile (Figure 2.7, panel B). Other explaining factors are the delayed impact of the significant peso depreciation during 2021 and 2022, and sharp increases in food prices caused by supply constraints from 2021 social protests and climate hazards. The El Niño weather phenomenon, which causes droughts, is nearing conclusion but has led to low reservoir levels and contributed to rising energy prices, but its expected impact on higher food prices has not materialised as expected. Core inflation has also declined to 5.5% in August. One-year ahead inflation expectations have declined since early 2023, but remain above target, at 4.2% in August.
Monetary policy has played a crucial role in reducing inflation with the central bank starting its easing cycle in December 2023, totalling a 250-basis points reduction since then. The easing cycle is midway and given falling expected inflation and a negative output gap, monetary policy can continue pursuing its gradual, prudent, cautious, and data-based easing cycle. Policy rate cuts are projected to continue through 2025 to bring inflation close to the 3% target by end-2025, in line with the Central Bank’s objective and announcements made by its Board of Directors at the end of 2023. Neutral real interest rates are estimated at around 2.5% for Colombia (Banco de la República, 2024[5]), higher than pre-pandemic levels due to the higher public debt ratio, an elevated sovereign risk premium, and tighter global financial conditions following the pandemic. However, caution is required as there are several upside inflation risks. The planned phase-out of diesel subsidies, while necessary, could add to inflationary pressures, although the impact on inflation should be lower than that of the 2023 petrol price increases. Other upward risks for inflation include wage and price indexation and persistence of inflation, unanchoring of inflation expectations due to prolonged deviations from the target, inflationary pressures from a possible extreme La Niña, tightening of external financial conditions, and heightened sovereign risk perception leading to exchange rate pressures and/or increases in the neutral real interest rate.
Source: Banco de la República, DANE; and OECD Economic Outlook (database).
Financial market regulation, macroprudential oversight, and banking supervision are sound, particularly following the adoption of Basel III standards in 2021. The banking sector remains resilient, with strong capitalisation and liquidity in banks (Figure 2.8, panel A and B). While there have been recent declines in some indicators of credit quality, these are manageable with the existing buffers. Profitability has declined from previous highs, particularly in the consumer portfolio (Panel C). Stress tests by the Central Bank and the Financial Superintendency confirm that even under adverse shocks, aggregate bank capitalisation exceeds regulatory limits (Banco de la Republica, 2023[6]).
Source: CEIC; Superintendencia Financiera de Colombia; BIS; and BRC.
Source: IMF Financial Soundness Indicators (database).
After growing at the fastest pace in over a decade, credit growth has decelerated, across all loan types, reflecting the normalisation of the economy and tight monetary policy (Figure 2.8, panel D). The slowdown was particularly pronounced for households’ consumer loans. This moderation in consumer credit growth reflects increased broad requirements for granting new loans, monetary policy tightening and higher provisioning requirements for consumer loans. As a result, the household debt-to-income ratio decreased in 2023 to levels well below historical peaks. Corporate indebtedness also declined to 49% of GDP in 2023, given the economic activity deceleration and the peso’s appreciation, but remains 3 percentage points above 2019 levels (Banco de la Republica, 2023[6]). Around 73% of corporate foreign currency-denominated private debt has risk mitigation measures.
Non-performing loans have risen in 2023 and the first months of 2024 (Figure 2.9), especially in consumer portfolios, because of the economic slowdown and previous risk-taking by lenders (Banco de la Republica, 2023[6]). The coverage indicator (provisions to non-performing loans ratio) decreased in 2023 due to a disproportionate rise in non-performing loans, although it remains at adequate levels. Counter-cyclical provisions in consumer and commercial sectors, intended to address scenarios of deteriorating credit quality, declined in 2023 (Banco de la Republica, 2024[7]). The microcredit segment requires close monitoring and strong supervision, as non-performing loans have risen rapidly, especially in unsupervised microfinance institutions (Banco de la República, 2023[8]). Given high interest rates and slowing economic activity, this trend may continue and jeopardise portfolio quality. Maintaining the rules-based mechanisms of the countercyclical provisioning framework, with cautious adjustments as needed, remains warranted.
Extreme weather events pose financial stability risks, requiring efforts to assess these risks and integrate climate risks into financial frameworks (see also chapter 5). Colombia was the first Latin American country to carry out a climate stress test of its financial sector. Led by the Financial Superintendence of Colombia, initiatives include incorporating climate-related elements into regulations, developing supervisory tools, and regulating green financial instruments. Adopting a risk-based approach to supervising climate-related risks, enhancing information disclosures, and improving data availability would further reinforce financial stability.
Colombia’s strong rule-based fiscal framework (Box 2.1), underpinned by a long-term commitment to fiscal sustainability, has provided macroeconomic stability and fiscal discipline since its implementation. Following the substantial fiscal response during the COVID-19 pandemic Colombia managed appropriately to narrow the fiscal deficit in 2022 aided by the strong economic recovery (Figure 2.10, Panel A). Deficits were further reduced in 2023, despite the growth deceleration and higher spending mainly for social transfers, over complying with the fiscal targets. The deficit decline benefited from the gradual elimination of petrol subsidies and gains from the 2021 and 2022 tax reforms (Box 2.2), even if the reforms fell short of the expected yield of 2.3% of GDP in 2023 due to the economic deceleration (CARF, 2023[9]), requiring some ad-hoc spending cuts. The increase in primary spending following the pandemic has been permanent, rising from 15.8% of GDP in 2019 to 20% of GDP in 2020 and 19% in 2023 (Figure 2.10, Panel B). This increase has only been partially financed through the 2021 and 2022 tax reforms.
Colombia implemented a fiscal rule in 2011 targeting the structural balance to enhance fiscal sustainability and to regain investment grade after losing it in 1999. Between 2011 and 2019, although fiscal rule targets were met, the government faced increasing fiscal pressure due to rapid debt accumulation (Arbelaez et al., 2021[10]). After appropriately suspending the fiscal rule in 2020 and 2021 to address the COVID pandemic, in 2021, a reform introduced a new fiscal rule to establish a link between structural net primary balance targets and observed net debt. The new rule includes an explicit debt anchor and sets a floor for the structural primary balance net of the economic and oil prices cycle and one-off transactions, as a direct function of the distance of net public debt to the anchor of 55% that will enter into force in 2026. Until 2026, a transition period is envisaged where the structural primary balance cannot be lower than -0.2% of GDP in 2024, and 0.5% of GDP in 2025. Due to the faster-than-expected decrease in net debt since 2021, which has now aligned with the anchor, the government is planning to bring forward the implementation of the parametric formula of the fiscal rule to 2025, pending congress approval. The rule also requires primary structural surpluses of at least 1.8% of GDP for net debt levels exceeding the limit of 71% of GDP.
Colombia's Medium-Term Fiscal and Expenditure Frameworks are also robust tools to align fiscal policy with fiscal rules, aligning budgetary decisions with long-term fiscal objectives. In addition, the 2021 reform created the Autonomous Fiscal Rule Committee that serves as an independent fiscal council, which has positively influenced fiscal policy decisions by providing constructive recommendations to the Ministry of Finance and shaping the public debate.
Note: The shaded area is a forecast from the Government Updated Financial Plan 2024 and the Medium-Term Fiscal Plan 2023-2027.
Source: Colombia Ministry of Finance, 2024 Updated Financial Plan and 2023-2027 Medium-term Fiscal Plan.
After the 2021 tax reform, in 2022 right after the current administration took office, a tax reform was passed to raise revenues by 1.0%-1.3% of GDP in 2023 and 2024, and then by about 1.3% from 2025. The 2022 reform aimed to limit the excessive use of tax expenditures that reduce the tax burden of higher-income taxpayers and create distortions between economic activities, internalise negative environmental and public health externalities, and reduce tax evasion and avoidance. This reform is a step in the right direction and has made the system less regressive.
The main measures of the reform include:
Individual Income Tax: Consolidation of labour and capital income. Lower nominal cap on tax-exempt income and deductions (790 UVT= USD 8 325).
Capital Gains Tax: Increased to 15%, with exemptions for certain transactions. Increase in the exempt amount for certain occasional gains.
Dividend Tax: Increased marginal rates for those not taxed at the corporate level as a withholding tax set at 15% for residents and 20% for foreigners.
Wealth Tax: Tax on fortunes made permanent and rates changed. Over COP 3.4 billion (USD 860 thousand; UVT 72 000) tax rates range from 0.5% to 1.5%. The highest tariff of 1.5% applies until 2027, when it reduced to 1%.
Corporate Taxes: Standard rate maintained at 35%. Reduction of tax rates for the small and medium enterprises in the Simple tax regime. Certain deductions capped at 3% of net income. Changing the 50% discount on the Industry and Commerce Tax (ICA) to a 100% deduction of the amount paid for this tax.
Surcharge for Specific Sectors: Additional income taxes for oil and coal if international prices exceed historical levels, in line with windfall taxes. The surcharge for financial sector is fixed at 5% until 2027.
VAT Exemptions: Removal of the three VAT-free days.
Carbon Tax: Gradual expansion to cover sales, imports, and extraction of coal from 2025.
National Tax on Single-Use Plastics: New tax on single-use plastic products.
Taxes on Ultra-Processed Goods: New levies on sugary drinks and highly processed foods high in sugar, sodium, or saturated fats.
Strengthening Tax Procedures: Penalties increased for asset omission and tax fraud.
The reform includes provisions to enhance enforcement capabilities and combat tax evasion, including taxation based on significant economic presence and institutional strengthening of the tax authority. These efforts are expected to reduce tax evasion and generate an additional 0.8% of GDP in revenue.
The expected increase in tax revenues from the 2022 reform will be lower, 0.4% of GDP in 2024 and 0.2% of GDP in the following years, as in 2023 the Constitutional Court struck down part of a law that prohibited extractive companies from deducting royalties paid to the government from their taxable income from the exploitation of non-renewable natural resources.
Central government gross public debt surged to 65% of GDP in 2020 but has since declined, driven by the phasing out of pandemic measures and robust economic recovery, to 56.5% in 2023 (Figure 2.11, Panel A). Net debt as a % of GDP has also decreased and converged to the fiscal rule net debt anchor in 2023. General government gross public debt is comparable to the average in other emerging markets of 60% of GDP, but borrowing costs have increased substantially since Colombia lost its investment grade in 2021, accounting for 4% of GDP in interest payments and 17% of total government expenditure in 2023 (Figure 2.11, Panels B and C). This increase is influenced by high global interest rates and a higher sovereign risk premium.
The 2024 Medium-Term Fiscal Plan targets an appropriate improvement in the structural primary balance of 1.2 percentage points in 2024 (MinHacienda, 2024[11]). This prudent tightening of fiscal policy balances debt sustainability, a negative output gap and still high inflation. However, the headline fiscal deficit increases to 5.6% of GDP (Figure 2.10), due to a shortfall in non-oil tax revenues and higher interest payments. The lower-than initially expected tax collection is due to challenges in reducing tax evasion, the absence of revenues from improved litigation processes following the withdrawal of the related bill from Congress, and the Constitutional Court's ruling against the 2022 tax reform's royalty deductibility prohibition. Consequently, the government is reducing its primary spending by 1.6% of GDP in 2024, relative to the previous plan, underscoring the administration's commitment to fiscal sustainability and compliance with the fiscal rule. However, public investment spending will be reduced by 0.5% of GDP relative to initial plans.
Note: In Panel A, forecast for 2024 refer to the Updated Financial Plan 2024, and for 2025 onwards to the Medium-Term Fiscal Plan 2023.
Source: Colombia’s Ministry of Finance, 2024 Updated Financial Plan and 2023-2027 Medium-Term Fiscal Plan; and IMF WEO (databases).
Government fiscal plans in the 2024 Medium-Term Fiscal Plan for 2025 foresee an improvement in the structural primary balance of 0.4 percentage points in 2025 in the limit of the fiscal rule. This assumes approval in congress of the earlier-than-planned implementation of the fiscal rule instead of the transition period target for 2025 (Box 2.1). However, the headline fiscal deficit will remain above 5% of GDP in 2025, reversing the post-pandemic decline for two consecutive years. Such high deficit leaves no margin for tax collection shortfalls, and interest payments remain high at around 5% of GDP in 2025 according to the medium-term fiscal plan and at 6% of GDP according the 2025 budget plan submitted to congress in late July. Such high interest payments leave little margin for important public spending and investment. Furthermore, if fiscal revenues fall short, ad-hoc spending cuts will again be necessary to comply with the fiscal rule, harming further public investment as budget inflexibilities further limit the scope for public spending cuts. In the short-term, maintaining the planned fiscal consolidation is key to prevent increases of public debt and investors’ concerns about fiscal sustainability and avoid higher borrowing costs. Doing so while avoiding cuts in public investment could be achieved by gradually eliminating distortive and ill-targeted diesel and public utilities subsidies and improving the targeting of social spending, as discussed below. The gradual elimination of diesel subsidies could create up to 0.7% of GDP in fiscal space.
Considering the government medium-term fiscal adjustment plan to maintain primary surpluses from 2027 onwards (see Figure 2.10) and unchanged tax and spending policies, OECD projections suggest that gross public debt will stabilise at 59% of GDP by 2050 (Figure 2.12, blue line). Concerns remain about the government plans to raise 2.2% of GDP in additional fiscal revenue without further comprehensive tax reform. In the medium term, the government should focus on achieving higher tax revenues and raising spending efficiency, as discussed below, while building fiscal buffers to accommodate future shocks.
Note: The “current policies” scenario assumes existing tax and spending and the implementation of government consolidation plans in compliance with the fiscal rule. It assumes real GDP growth and inflation to follow OECD projections over 2024-25 as in Table 2.1, after that real GDP growth gradually converges to a potential output growth of 3%; the inflation rate is assumed at the target of 3%; and the exchange rate between the Colombian peso and the US dollar is assumed constant over the simulation period. The government primary balance is assumed to follow authorities’ medium term fiscal plan over 2024-2035, in compliance with the fiscal rule, and constant primary surpluses are maintained until 2050. The “higher spending needs” scenario assumes a higher 0.7% of GDP annually in primary expenditure than in the “current policies” scenario, as an illustration of the costs of passing the pension reform and other spending needs related to health reforms and the green transition. The “growth enhancing reforms” scenario assumes on top of the higher spending scenario, the implementation of an ambitious package of selected structural reforms as the one recommended in Table 2.3 from 2026. The “Economic Survey fiscal reforms” scenario assumes on top of the higher spending scenario, the implementation of a tax reform and spending efficiency reforms as recommended in Table 2.3. All scenarios account for ageing-related costs, which are estimated to total 2.5% of GDP over the entire period from 2025 to 2050 (Pessino and Ter-Minassian, 2021[12]).
Source: OECD calculations.
In the medium term, financing higher post-pandemic spending, social reforms, the green transition, and infrastructure gaps will require additional spending leading the public debt-to-GDP ratio to increase significantly (Figure 2.12, red line). For example, the pension reform bill, not yet factored into the medium-term fiscal plan, could require an additional 0.5% of GDP annually in the short term to finance the non-contributory and semi-contributory pillars of the system (CARF, 2024[13]), increasing to 0.6% of GDP in 2040 and 1.1% beyond 2065. The contributory system will require more resources in the long term due to the greater needs of the pay-as-you-go system, needing about 2.5% of GDP from 2065 onwards. Although Congress shelved a recent health reform proposal, the government plans to present a new one with the same core elements. The Ministry of Finance estimated the previous reform would have cost an additional 0.4% of GDP per year in the short term, peaking at 0.6% in 2027, and falling to 0.2% by 2042. However, the fiscal council (2023[14]) notes this estimation overlooks potential cost overruns, including higher primary care costs and inadequate regional management capacity. Colombia also needs to increase public spending to support ambitious climate and energy transition plans (see chapter 5). Meeting climate goals requires between 1% to 2% of GDP annually over the next 20 years (MinHacienda, 2024[11]). While most of this investment must come from private sources, public expenditure must also increase from the current 0.16% of GDP. Furthermore, by 2050, Colombia could lose up to 6% of its government revenues due to the energy transition away from fossil fuels. While government reindustrialisation plans aim to boost economic growth and diversify the economy, the transition could bring pressures on the revenue side.
To put debt on a declining path while addressing spendings needs will require measures to raise tax revenues and improve spending efficiency (Figure 2.12, purple line and Table 2.4), as discussed in the next sections. An ambitious package of structural reforms to enhance growth, including the transition to a higher diversified and more competitive economy, would also help to put debt on a declining path (Figure 2.12, green line, and Table 2.4). The government reindustrialisation policy (see Chapter 3) which aims to diversify the economy, by developing value chains, deepening internationalisation and closing local productivity gaps, could lead to an annual 0.3 percentage point rise in economic growth by 2034 (MinHacienda, 2024[11]).
Note: The estimated fiscal impact of the health and pension reforms by 2040 is assessed by CARF (2023[14]; 2023[15]; CARF, 2024[13]). The need to increase the carbon tax is assessed in Chapter 5 of this Economic Survey.
Source: OECD estimates.
Illustrative estimated impact of selected reforms on potential GDP after 15 years relative to the baseline
Note: Simulations based on the OECD long-term growth model (Guillemette and Château, 2023). Potential output estimation is based on a Cobb-Douglas production function with constant returns to scale based on the OECD long-term growth model. Scenario A assumes that female employment rates reach the OECD average by 2050, a 1.5 increase in years of schooling relative to today and that average PISA scores in reading, math and science converge to Chile’s PISA scores by 2050. Scenario B assumes that the rule of law indicator converges to the first decile of the OECD rule of law by 2050. Scenario C assumes that Colombia’s product market regulation score and government R&D expenditure converge to the OECD median by 2050. The individual reform effects do not sum up to the effect of the ambitious reform scenario due to non-linear effects in the model.
Source: Simulations using the OECD long-term model (Guillemette and Château, 2023).
2.5.1. Implementing spending reviews
The need to meet the fiscal rule, together with enhancing Colombia’s growth potential and support the energy transition makes improving the efficiency of public spending a fundamental priority. Colombia's general government spending, at 34% GDP in 2022, is lower than that of most OECD countries with an average of 46% of GDP, and there is a need to increase investment in pensions, health, education, and infrastructure as discussed elsewhere in this Survey. however, there is also a need to enhance the quality of this expenditure. In the short term, identifying savings or reallocation measures and improving effectiveness within programmes and policies can help Colombia meet the fiscal targets in the short term. Public spending inefficiencies abound in Colombia and are estimated at around 4.8% of GDP annually in 2017 (Izquierdo, Pessino and Vuletin, 2018[16]).
To weed out wasteful spending and effectively allocate resources among priorities a more systematic use of spending reviews could help (DNP & Fedesarrollo, 2018[17]), building on the experiences of other OECD countries. To successfully pursue spending reviews OECD experience suggests that Colombia will need to improve its governance, set up clear objectives for the reviews, foster cooperation between line ministries and carve out high level political support. Establishing a steering committee of senior officials and a working group comprising relevant officials from the Ministry of Finance and line ministries will also help. Moreover, Colombia needs to integrate spending assessments into the government budget planning, particularly within its medium-term framework, to promote spending transparency and help reduce wasteful spending, aligning with OECD best practices (Tryggvadottir, 2022[18]). Setting clear targets for spending cuts or reallocation measures has proven to be a key success factor in OECD countries, as it facilitates monitoring when implementing the results of the spending review.
2.5.2. Improving the targeting of social spending and eliminating distortive subsidies
The targeting of public spending is poor, with a significant share of social spending benefiting the relatively rich (Figure 2.13). This is especially true in the case of pensions, housing, and subsidies for public utilities, such as electricity or telecommunications. For example, 73% of pension implicit subsidies, go to high-income households, while only 5% reach the poorest households (Fedesarollo, 2021[19]), an issue the government is address with the recent pension reform as discussed in Chapter 4. Following the COVID-19 pandemic, the targeting of social assistance programmes was significantly improved, given that before the pandemic the main poverty alleviation programme, Familias en Acción, allocated almost 40% of its spending to non-poor families, as discussed in the 2022 Economic Survey (OECD, 2022[20]). Progress has continued with recent efforts to establish a household social registry and an universal income registry, integrating tax records and allowing for self-declaration of income to better identify beneficiaries in 2023. These are welcome steps and should continue to enhance the efficiency and effectiveness of social assistance programmes.
Note: Poor refers to the national poverty line. Pensions reflect only the implicit subsidy in the public contributory scheme. Education covers all public education institutions, while education grants refer to educational subsidies and scholarships. Public utilities include subsidies for energy, water, sewerage, and communications. Colombia Mayor is a cash transfer for elderly people in extreme poverty and without a pension.
Source: (Fedesarrollo, 2021[21]).
Subsidies for public utilities are one of the most ill-targeted items, with 80% of spending going to non-poor households. These subsidies accounted for around 0.8% of GDP in 2022. Moreover, the subsidies reduce incentives for lower energy use and distort price signals, going counter the government’s ambitions to reduce greenhouse gas emissions (see Chapter 5). For example, 90% of households receive subsidies for electricity and 60% for gas (Eslava, Revolo and Ortiz, 2020[22]). Rather than using subsidies, it would be best to support vulnerable households through targeted cash transfers. If utility subsidies cannot be eliminated, its targeting needs to improve. Rather than using the current system that does not consider income vulnerability and lacks updated strata, it would be better to use the recently improved household social registry (Sisbén), as was done for housing subsidies in 2023.
Continuing the welcome path of gradual elimination of fuel subsidies would save scarce public resources and support Colombia’s goal of reducing reliance on fossil fuels. In 2023, the government commendably eliminated petrol subsidies, improving spending efficiency. Since October 2022, monthly adjustments in liquid fuel prices have closed the gap between international and local petrol prices. The government announced that petrol prices will be linked to international prices to prevent future subsidies. Implementing the announcement of the gradual elimination of diesel subsidies is warranted, although the political economy of this measure is proving difficult. Recently, the government announced the elimination of diesel subsidies for large consumers, and a slight reduction for truck drivers. Further efforts to close the gap between the diesel price and its international price could yield savings of 0.6%-0.7% of GDP in public expenditure by 2025 (MinHacienda, 2024[11]), allowing for reallocation of government spending towards more productive and sustainable areas, and encourage investment in cleaner technologies and renewable energy.
2.5.3. Reducing budget rigidities
Colombia’s excessive budget inflexibility undermines the government’s ability to allocate spending to evolving needs and priorities and poses challenges when revenues fall short, leading to higher debt or public investment cuts. Historically, also due to spending rigidities, public investment has fluctuated with revenues in a highly procyclical pattern (Arbelaez et al., 2021[10]). Around 90% of Colombia’s central government primary budget is pre-mandated, because of operational expenditures, transfers mandated by law, earmarking, transfers to sub-national entities, and social programmes (CARF, 2023[23]). Colombia implemented budget flexibilisation measures in the 2000s, including constitutional and legal reforms to reduce inherited budget inflexibility, but some measures have been reversed since then (Herrera and Olaberria, 2020[24]). One notable concern is the high level of spending rigidity derived from constitutional provisions that allocate fixed shares of revenues to subnational entities trough the General Participation System. These transfers are linked to the growth of the central government’s current revenues over the last four years, irrespective of actual needs. For example, 40% of the revenues gain from the last two tax reforms, in 2021 and 2022, must be allocated to this transfer system (CARF, 2023[23]). Mandated spending and revenue earmarking should be reevaluated to reduce budget rigidities as recommended in the (2019[25]) Economic Survey of Colombia. For example, implementing a more needs-based approach, rather than tying transfers to revenue growth, would ensure resources are allocated where they are most needed. Moreover, municipalities and regional departments heavily depend on central government transfers, highlighting the need for reforms to encourage quality public service delivery and bolster subnational capacities, as discussed in Chapter 3 and in line with the decentralisation mission suggestions.
Raising more tax revenue will also be needed to address key spending needs and maintain Colombia’s commitment with fiscal prudence and debt sustainability. Colombia has undergone 21 tax reforms between the 1990s and 2022 (Figure 2.14, panel A), one every year and half, as described in the last six OECD Economic Surveys (OECD, 2022[20]; OECD, 2019[25]; OECD, 2017[26]; OECD, 2015[27]; OECD, 2013[28]), which have gradually increased tax revenues. However, rather than simplifying the system and improving the tax mix, these frequent and fragmented tax reforms have led to more complexity and inequities often taken the form of tax expenditures, placing a particular burden on businesses within the tax system (Figure 2.14, Panel B). The 2022 tax reform is a step in the right direction to reduce some of these tax expenditures and increase collection from PIT revenues. Frequent reforms have also led to uncertainty and legal insecurity for private investment.
A comprehensive tax reform, properly sequenced and gradually implemented, could not only increase revenues to fund necessary social, infrastructure and climate change needs but also enhance productivity and reduce inequalities. The reform should rebalance the tax burden from corporate to personal income tax, simplify the tax system, reduce tax expenditures and address tax evasion, as outlined in the past OECD Economic Surveys of Colombia and the 2021 Tax Expenditure Report (OECD, Dian and Ministerio de Hacienda, 2021[29]; OECD, 2022[30]). Implementing such reform could yield substantial additional revenues of up to 4.3% of GDP (Table 2.3).
Note: LAC is a simple average of ARG, BRA, CHL, CRI, MEX, and PER. In Panel A, the 2023 estimate for Colombia is based on calculations by the Colombian Ministry of Finance. In Panel B, OECD refers to 2022 or the latest available year.
Source: OECD Revenue Statistics in Latin America (database); OECD Revenue Statistics (database); and Colombian Ministry of Finance.
2.6.1. Reducing the tax burden on businesses and streamlining corporate income tax
The statutory corporate tax rate, at 35% in 2023, is very high relative to the OECD average of 23% (Figure 2.15, Panel A). Gradual rate reductions were legislated in 2018, while a 2021 tax reform increased the rate again to 35%. Other distortive business taxes increase the tax burden way above the statutory corporate income tax burden, like the local business turnover tax ICA, all of which weaken investment incentives and are likely to have negative growth effects (OECD, 2022[20]).Effective corporate tax rates in Colombia are also high, with the average effective tax rate at 29.2% in 2021, surpassing both the Latin American average of 24% and the OECD average of 22% (Hanappi et al., 2023[31]). Moreover, significant dispersion of effective tax rates in different sectors, ranging from 33% to 90% in 2019 (Figure 2.15, Panel B), together with special treatment clauses, discounts and differential rates make the tax system complex (Figure 2.15, Panel C), fostering informality, especially among small businesses.
Colombia should consider gradually eliminating exemptions, discounts, or differential rates, while decreasing the statutory corporate tax rate and phasing out other distortive taxes that businesses need to pay. Broadening the corporate income tax base should go hand in hand with abolishing other distortive business taxes. Such reduction of the tax burden on businesses can promote fairness among entrepreneurs, encourage investment and business formalisation, and enhance tax collection (Comité de Expertos, 2016[32]). The tax collection impact of reducing tax expenditures is uncertain and difficult to measure due to the lack of a clear benchmark tax system and inadequate data collection by tax authorities (OECD, Dian and Ministerio de Hacienda, 2021[29]; OECD, 2022[20]). The tax authority is working on a new independent report providing a clear benchmark following the recommendations of the OECD's 2021 Tax Incentives Commission. Highly conservative estimates suggest a reform that eliminates tax expenditures and reduces the statutory corporate rate to 30% could have a neutral impact on tax revenue or a slightly positive one (Fergusson and Hofstetter, 2022[33]). However, revenue forgone from tax expenditures is probably underestimated given data limitations (OECD, 2022[30]).
Note: In Panel A, LAC is a simple average of Argentina, Brazil, Chile, Costa Rica, Mexico, and Peru. In Panel B, data refer to both national and local taxes, incorporating all taxes remitted by businesses, inclusive of social security contributions and other corporate levies.
Source: OECD Tax Database (database); TRR 266 Accounting for Transparency (2022), “2022 Tax Complexity Index”; Fedesarrollo (2021), “Reformas para una Colombia post-covid-19: Hacia un nuevo contrato social”.
The 2022 tax reform appropriately eliminated some of the 146 special treatments identified in Colombia (MinHacienda, 2022[34]) by reducing nominal caps on tax-exempt income and deductions, eliminating approximately 60 tax expenditures, and imposing limits on 20 more. It’s crucial to assess its impact on revenue collection and horizontal equity of the reform to inform future reforms. For instance, the availability of a tax credit for businesses to offset VAT paid on investment in assets, although uncommon, addresses a deficiency in the VAT system. Typically, businesses should be entitled to reclaim input VAT paid on assets; however, this functionality is lacking in Colombia.
Many of the current exemptions or tax expenditures could be reconsidered, and a new rigorous process put in place to introduce new tax expenditures. Tax expenditure for corporate income was estimated at 1.4% of GDP in 2022, with a reduction of around 0.18% GDP thanks to the 2022 tax reform. Before introducing new tax expenditures, the effectiveness of those in place needs to be evaluated, those with positive and cost-effective impacts toward well-defined policy objectives could be retained and the rest eliminated. The gains from this reform could be redirected to targeted transfers for vulnerable populations affected by the change (OECD et al., 2023[35]).
Measures to reduce business informality are needed to boost tax revenues, requiring a comprehensive strategy across various policy areas, such as simplifying administrative procedures and improving access to finance, as discussed in Chapter 3, as well as a comprehensive business tax reform and stricter tax enforcement aligned with more detailed tax data collection by the tax administration. Since 2019, a simplified tax regime (Régimen Simple) for self-employed and micro and SMEs aims to facilitate formalisation. In 2022, the regime was modified to include reduced tariffs and expand eligibility. Ensuring integration of the popular economy, which encompasses a wide range of grassroots economic entities, including both individual and communal efforts, often informal and supported by kinship and local networks (see chapter 3) into the simplified regime would be key for formalisation. Furthermore, enhancing its design to facilitate micro and SMEs’ tax compliance is key to reduce informality and support business growth. Facilitating a seamless transition between the simplified and the general regime, by helping and guiding firms, would incentivise firms to grow and shift to the general regime. The simplification of the general regime, as discussed above, would be key for this seamless transition. For example, the Simples Nacional regime in Brazil provides a unified tax regime (covering a wide range of taxes) for micro and small businesses, simplifying compliance and allowing firms to transition to the general regime as they grow. A gradual increase in tax obligations and administrative requirements prepares businesses for the complexities of the general tax regime. Outreach campaigns to educate micro and small firms about the opportunities and benefits of the simplified tax regime are essential to promoting voluntary compliance. Continuous evaluation of the simplified regime is also needed to prevent any unintended disincentives to business growth driven by the discontinuities in the tax schedule. Moreover, to improve formalisation incentives, corporate tax rates could be based on net income to generate incentives to taxpayers to declare their costs and expenses, (Mas-Montserrat et al., 2023[36]).
2.6.2. Moving to a more progressive taxation of personal income
The personal income tax yields a low share of tax revenue, both in comparison with other countries in the region and with other OECD countries (Figure 2.14, Panel B) due to high labour informality and few Colombians paying personal income taxes. The 2022 tax reform has marginally improved the redistributive nature of personal income taxes and made permanent a wealth tax introduced during the pandemic, contributing to a reduction in inequality (Baquero, Dávalos and Monroy, 2023[37]), but more can be done.
The personal income tax base could be expanded significantly without impacting the bottom half of the income distribution. Only 5% of formal workers pay personal income tax due to a high labour income threshold below which no personal income tax needs to be paid (Figure 2.16, Panel A), as discussed in the 2022 Economic Survey of Colombia. A complementary two step reform would increase the tax base and make the system more progressive. The first step would involve gradually lowering the basic personal income tax threshold while simultaneously reducing the entry tax rate. In a second step, to reduce informality, social security contribution rates for low-income workers should be reduced, as evidence suggests that reducing the tax wedge, as demonstrated by the 2012 tax reform, would contribute to reducing informality, although is not the only driver of informality (as discussed in Chapter 4). The combined effect of these changes would be progressive because those newly subject to the personal income tax would have higher incomes than those benefiting from reduced social security contributions, ensuring the overall progressivity of the reform. By reducing informality, this reform would also boost productivity and growth. Introducing an earned income tax credit would enhance progressivity further and promote stronger formal labour market participation among low-skilled workers (Pessino et al., 2021[38]).
The gap between statutory and effective tax rates remains significant, particularly for high-income deciles (Figure 2.16, panel B) (Fergusson and Hofstetter, 2022[33]; CPC, 2022[39]; Fedesarollo, 2021[19]). Further streamlining and reducing exemptions and deductions that widen this gap and complicate the tax code could help (Baquero, Dávalos and Monroy, 2023[37]). Examples are the pension income exemption, the exemption of voluntary pension contributions and the mortgage interest deduction. Tax deductions and exemptions of certain incomes cause revenue losses of around 0.7% of GDP and significantly diminish tax progressivity (MinHacienda, 2024[11]). This estimate is likely underestimated due to similar data collection issues as those relevant to the corporate income tax (OECD, 2022[30]).
2.6.3. Continuing to reduce tax evasion and avoidance
Colombia’s strides against tax evasion and avoidance, spurred by recent reforms, must persist. On-going efforts include measures to bolster the tax administration through increased resources and capacity building and digitalisation efforts. The challenge lies now in effectively leveraging these resources to improve enforcement. While the 2021 and 2022 tax reforms have introduced significant measures to reduce tax evasion, there is still significant scope to reduce tax evasion. Estimates suggest that tax evasion leads to revenue losses exceeding 5% of GDP (Benítez et al., 2021[41]).
The tax authorities need to apply more data driven processes to avoid abuse including through risk-based auditing and cross-checking different data streams. Colombia has modernised its tax filling process by including suggested values in PIT returns from third-party data, helping to encourage proper filing and reducing evasion. There is still significant scope to improve tax returns fills to improve granularity of data, as currently corporate and personal income tax returns are not sufficiently detailed to appropriately identify revenue foregone of tax expenditures (OECD, 2022[20]), making the audit of tax evasion harder. As the income tax base becomes broader, a mandatory universal income declaration would foster a positive tax culture, fostering transparency and compliance, reducing tax evasion, particularly if this is accompanied by measures to make the income declaration process more straightforward and efficient. In Colombia, only 10% of the population declared any income in 2020, while countries like Austria and Finland achieved rates as high as 98% (CPC, 2023[42]). Some countries like Canada, the United States, the United Kingdom, and Australia have tax systems requiring individuals, including those with low or no income, to file tax returns for various reasons such as accessing tax expenditures, social assistance programmes, or to keep tax information updated. In the United States, for example, even if a person has no income, they may still need to file a tax return to access certain tax credits or the child tax credit.
Once data collection abilities have improved, Colombia could leverage technologies like Artificial Intelligence and Blockchain to streamline processes and enhance tax compliance (Box 2.3), following Estonia’s example. Using technologies like Artificial Intelligence, Estonia enhances cross-data verification, automates data flows, recognises tax patterns and anomalies and simplifies tax declarations (e-estonia, 2023[43]). Blockchain technology prevents information duplication across government authorities and automates tax payments, such as social security deductions through smart contracts. Moreover, real-time information systems can mitigate fraud risks by calculating value-added taxes along the supply chain. Other recommendations to reduce tax evasion are limiting the use of cash, which accounts for 90% of all private transactions, and continue making progress on electronic invoicing, as recommended in past OECD Economic Surveys (OECD, 2022[20]; OECD, 2019[25]).
E-Tax System: Estonia’s e-tax system allows both individuals and businesses to file taxes online easily. This system has simplified tax compliance, reduced paperwork, and minimised administrative burdens.
X-Road Platform: Estonia’s X-Road platform serves as a secure data exchange system, facilitating seamless communication between different government agencies and entities. This interoperability has streamlined tax administration and enhanced efficiency.
Digital Identity: Estonian citizens have digital identity cards, enabling secure access to various e-services, including tax-related transactions. This authentication system has improved security and reduced the risk of identity fraud.
Automation and Artificial Intelligence: Estonia has leveraged automation and artificial intelligence (AI) to streamline tax processes, such as data verification and tax calculations. This has increased accuracy, reduced errors, and enhanced overall tax administration efficiency.
Transparency and Accountability: Estonia prioritises transparency and accountability in its tax system, with clear regulations and reporting requirements. This fosters trust among taxpayers and helps combat tax evasion and avoidance.
International Cooperation: Estonia actively participates in international efforts to combat tax evasion and avoidance, including information exchange agreements and collaboration.
Each year, around 99% of all tax declarations in Estonia are filed electronically (e-Estonia, 2023), 99% of taxes are filed online and the average time to fill a tax in the country is three minutes.
Source: E-Estonia. (2023). Interoperability services. https://e-estonia.com/solutions/interoperability-services/
2.6.4. Broadening the value added tax base
VAT revenues could significantly increase by limiting exemptions and reduced VAT rates, along with improving compliance, as discussed in the 2022 OECD Colombia Economic Survey. Exemptions and reduced rates impact various goods and services, including health, education, and food, which disproportionately benefit higher-income households. The VAT rate in Colombia is 19%, but zero and reduced rates and exemptions affect not only basic consumption items, but a wide range of goods and services across health, education, food, medicines and transportation, in addition to computers, tablets and mobile phones up to a price cap. The related revenue loss amounts to 5.3% of GDP in 2023 (MinHacienda, 2024[11]). To mitigate the impact on the poorest households of these reforms, compensation mechanisms such as means-tested benefits, like the existing VAT Compensation programme (Compensación del IVA), a cash transfer for poor households, could be enhanced and integrated with other assistance programmes.
2.6.5. Raising more revenues from immovable property by updating and completing the land registry
Recurrent taxes on immovable property (predial) are crucial for municipalities, constituting their main source of income, generating revenues of about 0.7% of GDP in 2022, one of the highest proportions in Latin America but behind some other OECD countries (Figure 2.17). The government is updating the multipurpose land registry to address land management issues, ensure property legal security, and enhance municipalities’ territorial and financial management, marking significant progress in advancing cadastre coverage, as discussed in Chapter 3. This is welcome; municipalities with updated cadastres reported revenue increases ranging from 11% to 30%. In the long run, conservative estimates suggest that tax collection for immovable property could be increased by 0.3% of GDP.
Note: Year 2022, except for Australia (2021). LAC is a simple average of Argentina, Brazil, Chile, Costa Rica, Mexico, and Peru.
Source: OECD Revenue Statistics in Latin America and the Caribbean (database); and OECD Revenue Statistics (database).
Finally, as highlighted in Chapter 5, there is substantial room to adjust the carbon tax by increasing its rate and broadening its base to better align with mitigation objectives. The additional revenues generated can support sustainable investments and assist vulnerable populations. Furthermore, integrating climate and environmental forecasts and risks into the medium-term fiscal framework would ensure alignment with targets and effective mitigation and adaptation to climate-related economic risks.
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