Colombia’s government presents “Economic Rescue Bill”

Colombia's Vice-President Jose Manuel Restrepo unveiled an Economic Rescue Bill on Thursday, aimed at curbing government spending and boosting revenue. This legislation grants President Abelardo de la Espriella extensive powers to cut spending via executive decree and introduces a tax reform encompassing higher sales tax on various goods and services.

Among these changes, the bill proposes raising taxes on gasoline, coffee, cigarettes, and vegetables. Simultaneously, it offers tax breaks to corporations to stimulate investment. Although President de la Espriella vowed to reduce the government sector by 40% during his campaign, the bill does not meet this ambitious target. Article 7 of the bill empowers the president to abolish, merge, or split ministries and administrative departments, as well as determine or alter their names, missions, and organizational structures.

Moreover, Article 96 permits the government to alter the personnel hiring process of the tax agency DIAN, potentially eliminating competitive exams and reinstating the practice of appointing thousands of officials. The bill also mandates a 20% reduction in the salaries of government employees, excluding security forces, and cuts half of the costs associated with temporary contracts.

The bill seeks to remove popular products from a VAT exemption list and impose a 19% sales tax on them. Additionally, it intends to charge VAT on luxury items like liquor and cigarettes, potentially increasing their price by up to 53%. These tax hikes, however, would not be implemented until after the November 2027 local and regional elections as a concession to Congress and Colombia's political landscape.

To mitigate the impact on the poor, the bill proposes a mechanism to refund up to 100% of IVA payments to roughly 19 million of Colombia's most impoverished citizens. Despite these measures, the increased burden on the middle class has already sparked opposition within President de la Espriella's congressional coalition. The government aims to gradually lower the corporate income tax from 35% to 31% and provide a reduced tax rate for large companies investing in new ventures.

However, according to the Inter-American Development Bank, a comparable scheme introduced by former President Alvaro Uribe proved ineffective in stimulating investment.