OECD ECONOMIC SURVEY OF COLOMBIA – EXECUTIVE SUMMARY . 5
Tax revenues of only 20% of GDP are insufficient to meet rising social demands while preserving necessary public investment in infrastructure, education and health. Personal income taxes, which only 5% of Colombians pay, are the principal explanation behind this low tax collection (Figure 3), while widespread tax expenditures and tax evasion curtail revenues across all tax areas. High business taxes reduce investment incentives, particularly as the business sector will finance a significant part of the planned fiscal adjustment. However, the political economy of tax reform is complex, as previous plans to increase income and consumption taxes were widely opposed by social unrest in May 2021. Looking ahead, enhanced social benefits will continue into 2022 and further underpin private consumption (Table 1). Infrastructure investment is buoying investment, while strong commodity prices and improving prospects in the main trading partners are supporting exports. Inflation has risen lately, but inflation expectations remain well-anchored. The Central Bank should continue the gradual withdrawal of monetary support to the extent that inflationary pressures intensify. In a longer view, however, both growth and social inclusion are trapped by weak policy settings that prevent firms from growing and becoming more productive while precluding more than half of Colombia’s income earners from formal jobs and social protection. Productivity growth has been weak for two decades, including relative to regional peers and investment has weakened. Unless both can be raised, potential growth will be lower than in past decades, as support from commodity prices and demographics is vanishing.
Low and declining competitive pressures in a number of sectors are one reason behind weak productivity. Regulations hamper firm entry, while informality of firms and jobs creates both an uneven playing field and incentives for firms to remain small. Besides these domestic factors, tariff and non-tariff barriers, with high tariff dispersion and a rise in peak rates, stand in the way of stronger engagement in international trade and investment flows. Exports remain concentrated in a few commodity sectors and trading partners. Table 1. A strong recovery is underway
Gross domestic product (GDP) Private consumption Gross fixed capital formation Exports
2021
2022
2023
9.5
5.5
3.1
13.6
5.6
3.8
8.3
4.6
6.5
11.5
10.9
6.9
Imports
27.7
10.6
6.0
Unemployment rate
13.7
11.8
10.7
5.6
4.6
3.3
-7.1
-6.1
-4.6
-3.7
-2.6
-1.3
63.8
62.5
62.4
Consumer prices (end of period) Headline fiscal balance (% of GDP) Primary fiscal balance (% of GDP) Public debt (gross, % of GDP)
Source: OECD Economic Outlook database.
Expanding social protection and reducing informality are key priorities Colombia has one of the highest levels of poverty, income inequality and labour market informality in Latin America. Despite a strong crisis response, social benefits do little to alleviate inequalities, and most social spending goes to the non-poor, particularly in the case of pensions. Over 60% of workers have informal jobs and no access to social security benefits except health. A key factor behind labour informality are high non-wage costs that finance formal-sector social security benefits and a high minimum wage whose level is close to the median wage. These put a high price on formal jobs and generates a vicious circle that perpetuates informality and exclusion.