Colombia’s Fiscal Reckoning: When the State Starts Consuming the Economy

Colombia faces a fiscal problem that can no longer be treated as a temporary difficulty or as the result of decisions made by a single government. For at least the last three administrations, those of Juan Manuel Santos, Ivan Duque, and Gustavo Petro, public spending and debt have followed a persistently upward trajectory. Governments with deep differences in their political orientations ended up sharing the same trend, expanding the size and obligations of the state without making a proportional correction to its spending structure. The result is an economy in which the public sector has grown faster than the productive capacity that must finance it.

The figures for the 2027 budget show how far this dynamic has gone. The proposed budget amounts to 634.9 trillion pesos, close to 30 percent of GDP. Of that total, approximately 392.6 trillion corresponds to operating costs, 155.4 trillion to debt service, and barely 87 trillion to investment. In other words, around 86 percent of the budget is committed to maintaining state operations and paying accumulated financial obligations, while investment represents only about 14 percent. The most important fact is not simply that the budget is large, but its composition. The state increasingly needs more resources to finance itself and to attend to commitments made in the past, while a much smaller proportion remains available to expand future productive capacity.

This is the first major transformation that must be recognized. The Colombian problem does not consist solely of the fact that public spending has increased, but that this increase has been progressively concentrated in current obligations, transfers, and debt service, while investment loses share. A state can grow without necessarily deteriorating the economy if a substantial part of its resources goes to investments that raise productivity, improve infrastructure, strengthen human capital, or reduce the costs faced by the private sector. But when expenditure growth is used mainly to sustain existing obligations, its ability to generate future growth diminishes.

The evolution of capital formation confirms the problem. Gross fixed capital formation fell from 23.4 percent of GDP in 2015 to 17.3 percent in 2024 and to 16.7 percent during the first nine months of 2025. The drop is too deep to be considered a minor fluctuation. Colombia is accumulating less productive capital than a decade ago, precisely when it would need to do the opposite to raise its productivity and achieve higher growth rates. An economy that invests less in machinery, infrastructure, technology, and business capacity can maintain a certain level of consumption for some time, but it is reducing the capacity it will have to produce in the future.

The same trend is observed in the relationship between savings and investment. The weakening of domestic savings and lower capital formation force greater reliance on external savings to finance the investment that the economy still makes. This limits Colombia's ability to sustain a vigorous capital accumulation process with its own resources. The problem is not only how much the country invests today, but the insufficient generation of internal resources to finance much greater investment tomorrow.

It is at this point where the phenomenon of crowding out the private sector appears. The state obtains resources from the economy mainly through taxes and debt. Taxes reduce the resources that businesses and households can allocate to investment, hiring, and savings; debt absorbs an increasing share of available savings and increases future financing needs. When the public sector persistently increases its share of the economy without a proportional increase in productive capacity, it begins to compete with the private sector for the resources both need to grow.

World Bank measurements allow us to observe this expansion particularly clearly in the evolution of public spending as a proportion of GDP. The series shows a substantial increase in the weight of state spending over recent decades and places Colombia at levels that can no longer be considered typical of a limited state. This measurement must be distinguished from narrower indicators, such as general government final consumption, which capture only a part of public spending. The relevant issue is that, under the measure of public spending used in the series, the state's share in the Colombian economy has increased considerably and is well above the country's historical levels.

International comparison confirms the dimension reached by that expansion. According to the OECD, Colombian general government expenditure, including all its dimensions, reached 49.7 percent of GDP in 2024, compared to an average of 42.6 percent for the organization's countries in 2023. Colombia is thus near a level where the public sector absorbs approximately half of the national product under a broad definition of government expenditure. The magnitude of this figure is especially significant for a middle income country that still faces enormous deficits in infrastructure, productivity, education, and institutional capacity. The problem is not that Colombia spends little in absolute terms, but that it spends an increasingly larger amount without obtaining from that fiscal effort an equivalent increase in its productive capacity. The World Bank figures confirm this trajectory and are unequivocal: while most countries in the world maintain their spending, without considering all its dimensions, below 30 percent of GDP, a tacit threshold of sustainability, Colombia exceeds it broadly. Colombia is not simply above average; it is above the rest of the world. And a state of that size is not sustainable in any context.

The Colombian paradox then appears with complete clarity. The state needs to increase its revenues because its obligations are constantly growing, but the way it has grown is reducing the private economy's ability to generate those additional revenues. The state ends up using an increasing proportion of national resources to finance its operations, its transfers, and its debt, while the private sector has less room to invest and accumulate capital. The result is a kind of vicious circle: more spending generates more financing needs; more financing requires more taxes or more debt; both mechanisms put pressure on private resources; lower investment reduces growth capacity; and lower potential growth makes it even harder to sustain the size reached by the state.

This dynamic also helps explain a worrisome feature of recent growth. Colombia can record positive rates of GDP expansion while its productive capacity deteriorates. In the second quarter of 2026, for example, GDP grew by 3.5 percent, while public administration, defense, education, and health activities registered growth close to 10 percent. At the same time, fundamental sectors for productive transformation, such as agriculture, recorded a contraction of 2.1 percent, and manufacturing industry grew by barely 2 percent. The problem is not that public spending contributes to GDP growth, as it inevitably does, but that it cannot indefinitely become the main support of an economy that needs to increase its productivity and private investment.

GDP measures current production; it does not measure future capacity to produce by itself. An increase in public spending can boost economic activity in the short term, but if that spending does not generate infrastructure, human capital, technology, or conditions for greater private investment, its contribution to potential growth will be limited. The real problem arises when an economy begins to finance an increasing part of its growth through an ever larger state, while simultaneously reducing the investment that should allow it to grow without permanently depending on that state.

That is why the solution cannot simply consist of raising taxes again. Colombia already faces a tax structure that is particularly adverse to business investment. The statutory corporate tax rate is 35 percent, compared to an average of approximately 23 percent in the OECD, and the effective rate also exceeds the organization's average. At the same time, the ratio of tax collection to GDP was barely 19.9 percent in 2024, compared to an average of 34.1 percent in the OECD. This reveals a deep contradiction: Colombia maintains a particularly high burden on certain productive activities, but fails to generate enough revenue with it to finance a state that has grown much faster. A lower middle income country that sustains a level of public spending close to half of its GDP can only do so by overloading its private economy with taxes; there is no other way to finance it.

Insisting on that strategy would lead to a predictable outcome. Each new tax increase aimed at financing structurally high spending would further reduce incentives to invest, formalize businesses, and expand production. The fiscal solution cannot be to continuously extract more resources from an economy whose capacity to generate those resources is being weakened. Colombia needs, instead, to reduce spending that does not increase its productive capacity and make better use of the resources it retains.

That requires a much deeper transformation than a simple budget cut. Unnecessary bureaucracy must be reduced, duplicate entities and programs eliminated, transfers and subsidies that are not adequately targeted reviewed, public procurement radically improved, and corruption fought. But budget priorities must also be changed: fewer resources allocated to maintaining permanent structures and more resources directed to infrastructure, quality education, science, technology, justice, security, and those public goods that allow the private sector to invest and produce more. The goal should not simply be a smaller state, but an economically more useful state.

In other words, Colombia needs to stop using the state as a substitute for the private economy and start using it as a platform for that economy to grow. The state must enable the creation of wealth, not become its primary consumer. It must focus on what the market cannot provide efficiently and withdraw from activities where its presence crowds out private resources, investment, and entrepreneurship. The difference is fundamental: a state that builds productive infrastructure can increase the capacity of the economy; a state that permanently increases its current expenditure mainly increases its own obligations.

The 2027 budget has made visible a reality that for years could be postponed through debt, higher tax revenues, and moderate growth. The new proposal raised the budget by 59.3 trillion pesos compared to the previous draft and recognized obligations that were not fully incorporated into the initial proposal. The so-called "budget of truth" did not create the problem; it simply made it harder to hide. The magnitude of the necessary adjustment is now evident because the accumulated expansion of the state has reached a point where ordinary revenues are no longer sufficient to comfortably cover its commitments.

Colombia can still correct course without waiting for a crisis. That is precisely the opportunity it must seize. The experience of countries that have reached the limit of their fiscal capacity shows that adjustments made before a crisis are much less costly than those imposed by the markets when confidence disappears. It is not necessary to wait until debt becomes unpayable, access to credit closes, or a currency crisis forces a disorderly reduction in spending. Fiscal consolidation can be done gradually if there is the political will to recognize the problem and act on its causes.

The real tipping point, therefore, is not in a specific debt or deficit figure. It lies in the relationship between the size of state obligations and the productive capacity of the economy that must finance them. Colombia is dangerously approaching that limit because the state has grown faster than the private economy. If that relationship does not change, the country will end up trapped in a dynamic where it needs an ever larger state precisely because its economy is increasingly less capable of supporting it.

Argentina offers a direct lesson. Javier Milei demonstrated, without ambiguity, that under firm and sustained decisions, it is possible to execute fiscal adjustments of greater magnitude in very short periods, on the order of two years. This dismantles the argument that reducing the size of the state requires decades of gradual processes: the real constraint was never technical, but one of political will. Colombia still has an advantage that Argentina did not have: it has not reached the point of collapse.

The conclusion is direct. Colombia cannot continue to grow the state at the expense of reducing the growth capacity of the economy that finances it. The priority must be to stop that dynamic now: reduce unproductive spending, contain debt growth, lessen burdens that penalize investment, and concentrate public resources on what raises productivity and allows the private sector to generate more wealth. The goal is not simply to close a fiscal deficit. It is to recover the Colombian economy's capacity to grow on its own terms.

Because, ultimately, Colombia's fiscal problem is not that the state spent too much during a single year. It is that for too long it has used an increasing proportion of present wealth to finance a state that, at the same time, is weakening the capacity to generate the future wealth it will need to sustain itself. If that trend continues, the state will not only end up consuming an ever larger share of the economy: it will end up consuming the economy it needs to survive.

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