OECD Urges Colombia to Simplify Taxes and Adhere to Fiscal Rule

The Organization for Economic Cooperation and Development (OECD) has released its latest economic outlook for Colombia.

The report offers crucial recommendations for the Colombian government’s macroeconomic policy implementation. OECD acknowledges Colombia’s progress in fiscal consolidation, which reduced public debt to 57% of GDP in 2023.

However, the organization warns of increased financing costs since Colombia lost its investment grade in 2021. The OECD emphasizes the need for continued fiscal prudence to meet the fiscal rule and ensure debt sustainability.

Compliance with the fiscal rule while maintaining social spending could be achieved through specific measures. The OECD suggests phasing out diesel subsidies, a topic that has recently sparked public debate.

Additionally, it recommends reducing public utility subsidies and improving the targeting of social spending. These steps aim to balance fiscal responsibility with social welfare commitments.

The report advocates for a comprehensive tax reform to address the uncertainty caused by frequent fiscal proposals. Colombia has implemented 21 tax reforms in the past two decades, yet tax revenues remain low.

The 2022 tax reform increased tax revenues and system progressivity, but frequent changes have heightened uncertainty.

OECD’s Tax Reform Proposal

The OECD proposes rebalancing the tax burden from businesses to personal income, reducing tax expenditures, and simplifying the tax system.

This comprehensive reform could potentially generate additional revenue of up to 4% of GDP. The proposal includes a gradual reduction of corporate income tax, aligning with the current fiscal proposal.

The report emphasizes the importance of expanding the corporate income tax base while abolishing other distortionary business taxes.

OECD Chief Economist Alvaro Santos Pereira stresses the significance of targeted spending to provide more fiscal margin for the government.

Furthermore, the OECD recommends mechanisms to reduce business informality to boost tax revenues. They suggest improving the current simple tax regime, which the government is considering eliminating in recent fiscal proposals.

The OECD projects Colombia’s economy to grow by 1.8% in 2024, aligning with the Ministry of Finance’s outlook. This forecast represents an increase from the 1.2% growth projected in May.

However, the OECD has lowered its 2025 growth expectation from 3.3% to 2.8%. Consumer spending is expected to contribute significantly to this economic rebound in the coming year.