Colombia’s Locked Budget: What the Fiscal Squeeze Means for the July 20 Tax Reform

Colombia · Money

Colombia’s handover fight now has hard numbers attached. The outgoing government has revealed a 2026 budget almost entirely locked.

Barely 35 trillion pesos (~US$10.4 billion) of room is left out of hundreds. That squeeze, more than the political theatre, is what makes the coming tax reform matter to residents.

A budget with almost no room

Presenting its handover report, the outgoing finance ministry said 93.7% of the 2026 national budget is inflexible. That money is tied up in debt service, pensions, health and prior commitments.

Those are the kinds of costs a government must pay whether it wants to or not. Debt has to be serviced, pensions have to be sent out, and health obligations do not pause.

What remains is only about 34.6 trillion pesos (~US$10.3 billion), roughly US$10 billion, of discretionary spending. In a budget measured in hundreds of trillions of pesos, that is a thin slice.

The ministry framed the position as the legacy the incoming government inherits. Whoever holds the purse from August has very little that is not already spoken for.

How it got here

The ministry attributed much of the squeeze to court and legislative decisions. It said those rulings stripped tens of trillions of pesos of available financing. However, our reporting has shown that roughly 90% of the national budget is structurally locked in by legal mandates for health, pensions, and territorial transfers—rigidities that predate the current handover fight and require congressional action to unlock.

That includes the striking-down of an earlier tax reform and denied financing laws. When a court blocks a revenue measure, the money it was meant to raise simply disappears from the plan.

The incoming government tells a different story. It points to spending choices and has promised a large budget cut for 2027.

Both sides are using the same numbers to shape opposing arguments ahead of August. One reads the figures as an inherited constraint, the other as a signal of overspending.

Why the tax reform matters now

Against a locked budget, the tax reform the outgoing government still plans to file on July 20 takes on added weight. When almost nothing can be trimmed, raising new revenue becomes the main lever left.

The bill reportedly seeks to raise around 21.8 trillion pesos (~US$6.5 billion) next year. That figure is set to rise further later in the decade.

Critics say the reform push also carries political risk: business federation Andi has warned that some sectors already face effective tax burdens exceeding 80% when the emergency wealth tax imposed earlier this year is factored in, further chilling the investment climate. It argues that fiscal design should be its own to shape once in office.

Whether the reform lands, and in what form, will help decide the country’s finances into 2027. A gap this size does not close quietly.

What it means for foreign residents

For expats and nomads, none of this changes a rule today. No rate moves before the August 7 handover.

The reason to pay attention is what a tax reform could contain. A locked budget makes new revenue measures more likely, and those measures tend to reach a wide base.

Colombian tax residents are taxed on worldwide income. So changes to income-tax brackets, VAT or wealth taxes would reach many foreigners living in the country.

A tight fiscal position makes a broad-based reform more likely, not less. When easy savings run out, governments often look to widen who pays.

What to watch

The near-term marker is July 20, when Congress reconvenes and the government could file its bill. That date is the first real test of whether the reform moves forward.

The other marker is the incoming government’s own fiscal plan, expected after it takes office. Together, those two moments frame the debate.

Between them, they will decide whether taxes rise and on whom. Until then, current rules stand, and there is nothing residents need to do today.

Frequently Asked Questions