Handing out the pre-election pork
Colombia began experimenting with wealth taxes at the beginning of this century. Wealth taxes have been criticized because they represent double income taxation: once when it’s produced, and again as assets. This may discourage savings and capital accumulation. But successive governments and ministers have relied on them. Under the Gustavo Petro administration, the fact that wealth taxes target the financial, mining and oil and gas sectors has been considered a form of revanchism against activities the president particularly dislikes. This is the wrong motivation for any sort of tax. The next administration, to begin on August 7, 2026, will encounter a horrendous tax system, shaped by a long tradition of wealth taxation and worsened by the Petro government.
The 2024 pension reform (Law 2381) is under review by the Constitutional Court, and its fate hangs in the balance. Some parts have already been enacted with the Court’s permission, chief a 2-year window during which certain contributors can move from private pension funds (AFPs) to the PAYG regime administered by Colpensiones. The reform states that, once these contributors start receiving a pension, the AFPs must transfer their savings in their individual accounts to a savings fund created by the reform, to be administered by the Central Bank. The fund is supposed to save the money, and to only transfer to Colpensiones the yearly flow of funds needed to pay the pensions of those who used the transfer window. The blunder is twofold. On the one hand, the government is asking for more money than it needs to cover the 2026 pension bill of the 22,000+ contributors. On the other, it is asking for money it shouldn’t be asking for under the spirit of the pension reform, leaving future administrations to find alternative to come up with the financing. Many interested parties will certainly challenge the future decree at the State Council. We think the State Council will suspend the decree while it reviews its content and justification -- and will just kill it in the end.
The aggressive 23.7% minimum wage hike for 2026 was undoubtedly a very damaging decision for the Colombian economy. It will have lasting negative effects, and likely reduce potential growth, increasing poverty and inequality and expanding the barrier to formalize the economy and, in particular, the labor market. It will be close to impossible to back away from this move. Interestingly, the government in its response to the State Council to justify the increase added up inflation, productivity, the share of wages on demand and many other things that cannot be summed, and still was 9 ppts short of the 23% requiring justification. It then said that those 9 points were the amount needed to close the gap between the MW and the “vital wage,” mentioned in the Constitution as a goal to be reached by social and economic policies.
For government popularity, though, the wage hike has been especially successful. A new Invamer poll shows a sharp increase in the president´s approval ratings (to 46%, above his 44% disapproval rating), while the willingness of respondents to vote for leftist presidential candidate Iván Cepeda also spiked. Per current numbers, Cepeda is on track to defeat any other candidate on hypothetical second-round scenarios. Mission accomplished.
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