Devolution and Fiscal Sustainability in Colombia

It is essential that any progress in devolution is accompanied by a thorough analysis of its impact on public finances.

According to ANIF, Legislative Act N° 18 of 2024, a parliamentary initiative that continues to be processed in the Congress of the Republic, proposes that transfers from the General Participation System (SGP) increase from 2027 for a period of 10 years, until a fixed share of 46.5% is reached of the Current Income of the Nation (ICN).

This would produce:

1. A significant increase in transfers (which are currently calculated based on current income growth (ICN) of the previous four years, but are not tied to a fixed percentage, in accordance with Legislation Act 04 2007)
2. Total budgetary inflexibility, eliminating the returns for the Government’s social investment and its operation. In practice, this reform would lead to the bankruptcy of the Colombian State.

To show the effect of this measure, it is noted that if GSP transfers in 2024 were linked to 46.5% of the current income of the Nation, the amount transferred would amount to 148 billion pesos, which represents an additional weight of 77 billion compared to the 71 billion scheduled for this year (22.2% of current income).

If this formula is applied, 95.3% of the National Central Government budget in 2024 would be committed to the following items:

• GSP transfers (46.5%)
• Interest payment (25.1%)
• Pensions (18.1%)
• Future Validity (6%)

This would leave the Government with barely 15 billion pesos available for public investment and operation. Otherwise, if the Government tried to maintain the current levels of expenditure in these areas, the fiscal deficit would increase to 10.1% of GDP, breaking the Fiscal Rule. Both options would be unsustainable and would seriously jeopardize the Government’s ability to face fiscal or economic crises, affecting key sectors such as social investment and infrastructure.

Although decentralization needs to be developed, this should not be done at the expense of the country’s fiscal sustainability. Modifying the current SGP formula so that it represents a fixed and high percentage of the Nation’s Current Income, without a clear limitation on powers, would endanger the solvency of the National Central Government. For these reasons, ANIF is of the opinion that Legislative Act 018 of 2024 should not be approved.

ANIF invites a broad debate on the deepening of devolution, devolution and territorial autonomy, taking into account the macro-economic factors that affect the fiscal sustainability of the country.

It is essential that any progress in terms of devolution is accompanied by a thorough analysis of its impact on public finances, so that the ability of the territories is strengthened without compromising national economic stability.

ANIF calls for this process to be carried out responsibly, ensuring that the proposed reforms are in line with the principles of sustainability and efficiency when using public resources.