Colombia goes to the polls with the best social indicators this century and a deficit only exceeded during the pandemic

The first left-wing government in Colombia’s recent history leaves behind it a legacy of social highlights and fiscal shadows. The unemployment rate is at a 21st-century low and multidimensional poverty fell to single digits for the first time. Tourism expanded and some agricultural sectors experienced a boom. Those achievements coexist with a fiscal threat and weak investment that could jeopardize the future. Profligate public spending, borrowing at high rates, and stable tax revenue have tightened the fiscal envelope. According to the UN Economic Commission for Latin America and the Caribbean (ECLAC), Colombia is already the Latin American country with the second-worst fiscal deficit.

The successor to Gustavo Petro, who will take office on August 7, inherits several favorable indicators. The labor market, although still dominated by informal jobs, closed 2025 with more than 600,000 net jobs created and the lowest unemployment rate of this century (8.9%). Multidimensional poverty — which does not measure income but social conditions in education, health, housing, and employment — finished 2025 at 9.9%, three percentage points below the 2022 figure, marking an improvement in living conditions for millions of Colombians.

By sector, tourism soared. Between 2022 and 2025 Colombia went from receiving 4.7 million to 6.5 million nonresident visitors, flooding the country with dollars: $7.73 billion in 2023 to $11.166 billion in 2025. For the first time, tourism revenues surpassed those from coal, an industry that, along with hydrocarbons (a major tax contributor), is in decline under a president who has distanced himself from fossil fuels in what he frames as a “life-or-death” choice. In rural areas, record prices for coffee and cocoa have injected fresh cash into hundreds of thousands of farming households.

José Ignacio López, president of the National Association of Financial Institutions (ANIF), identifies a growth pattern: “Subsidies, an expanding public payroll, and minimum wage increases put money into the pockets of millions of Colombians, which boosted consumption.” Even the banking sector — a frequent target of the president’s criticism — recovered.

But economists who are far from orthodox question the scale of these achievements. Jorge Iván González, director of the National Planning Department during Petro’s first year and a half in office, argues that in absolute terms monetary poverty — which measures household income — “has not improved in a decade.” He also says the drop in unemployment is “a mystery no one understands,” with no clear explanation. “Is it Petro? The mayor of Bogotá? Or the Char political household [from the Caribbean coast]?” he asks. He adds that GDP growth “is mediocre compared with the historical average of 3.9%” and has been driven by public spending.

Colombia grew 2.6% in 2025, consolidating the post-pandemic recovery, aided by private spending. Households ramped up consumption thanks to the higher minimum wage and remittances — mainly from the United States and Spain — which contributed nearly 3% of GDP in 2025 with $13.098 billion (10.6% more than in 2024). “Public consumption, for its part, is responsible for 63% of economic growth over the last three quarters,” says Luis Fernando Mejía, founder of Lumen Economic Intelligence.

The Autonomous Committee of the Fiscal Rule (CARF), an independent body that monitors public accounts, has identified “signs of overheating” in the economy: domestic demand grew in 2025 at a rate 1.5 times higher than production. That raises imports and fuels inflation through greater demand. The Gordian knot is that consumption has not sown productive capital. On the contrary: investment in factories, machinery, and infrastructure — what economists call capital formation — is at its lowest level in two decades (around 16% of GDP according to CARF, worse than during the pandemic). Heterodox economist Salomón Kalmanovitz emphasizes that for the first time public spending (17.3% of GDP in 2025) exceeds private investment, “damping the animal spirits of entrepreneurs” who might otherwise undertake new ventures.

The construction sector is feeling the investment anemia firsthand. Guillermo Herrera, president of the builders’ association Camacol, says these years are ending “weakened” and with “the lowest figures in years.” The construction GDP has recorded 11 consecutive quarters of decline — the entirety of Petro’s four-year term. Sales and new starts collapsed: in 2025 construction began on 112,000 housing units, while each year between 235,000 and 250,000 new households are formed. The human cost is 136,000 workers in the sector who lost their jobs.

For her part, Marcela Meléndez, director of economic research center Fedesarrollo, digs into the causes of the investment slump: “Regulatory uncertainty from successive reforms (labor, tax, health, pensions, and energy); a deterioration in security; and the highest corporate tax burden in the region, including a business wealth tax, which reduces attractiveness.” Low investment and weak growth erode the blueprint outlined by President Petro.

Macroeconomic challenges

Fiscal clouds could dampen the celebration. López, of ANIF, explains why a deficit discourages investment: “High government rates drain resources and make it harder for firms and households to obtain loans. If the yields on TES (local-currency government bonds) are high, entrepreneurship looks less attractive because buying public debt is an easier bet,” he explains. It is crowding out: when a government borrows so much that it displaces private investment, raises credit costs for everyone, and impedes long-term growth.

Although Colombia closed 2025 with a better than projected fiscal deficit (6.4% versus a projected 7.1%), it is already the second highest among the region’s large economies, behind only Brazil, according to ECLAC. Public spending has reached unprecedented levels, and the primary deficit — which excludes interest payments — worsened to 3.5% of GDP, exceeding the 2.4% target. That means the government is spending more than it receives even before paying interest on debts that in Colombia consume one of every three pesos of tax revenue, according to CARF.

In other words, the imbalance does not stem from a chronic mismatch in the state’s everyday operations. Although Finance Minister Germán Ávila presented an adjustment commitment in the financial plan, he did not specify how it would be implemented. CARF described it as “not credible” and warned Congress of the need for an unprecedented cut: of 4% to 5% of GDP — between $19.6 billion and $24.5 billion, or five tax reforms — in the next four years to stabilize debt and “avoid an episode of high financial stress.”

Adding to that fiscal pressure is another front: inflation. Although it fell from the 13.12% rate inherited from right-winger Iván Duque (2018–2022), it closed 2025 stubbornly around 5%, far from the Banco de la República’s 3% target. So far this year it has risen again, with forecasts of a year-end rate above 6%, and the central bank has raised its interest rate by two percentage points this year, pausing at its last meeting. The peso’s strength against the dollar has contained price pressures by making imports cheaper. But higher rates cool the economy — making credit more expensive and slowing consumption — and squeeze public finances further because they raise debt-service costs.

That dilemma between fiscal adjustment or interest rates that strangle the economy opens the door to a feared scenario: stagflation, an economic stagnation alongside rising prices. Hernando Zuleta, dean of the School of Economics at Universidad de los Andes, warns that “if a future government refuses fiscal adjustment and decides to intervene in the Banco de la República to print money and finance public spending, inflation would skyrocket.”

That would be a shortcut, because inflation erodes debt in two ways. First, inflation raises the number of pesos the state collects: firms sell at higher prices, wages rise, VAT receipts increase. Thus, paying the same nominal peso amount becomes easier. Second, inflation increases GDP measured in pesos. If GDP rises from 500 to 550 trillion pesos due to inflation, the same 100 trillion debt falls from 20% to 18% of GDP. The ratio improves by a mere accounting effect, without the government having paid a peso.

This is what Zuleta calls “fiscal adjustment via inflation,” essentially an invisible tax. Petro leaves office with popular approval because people felt money in their pockets, even as public coffers deteriorated. Meléndez unties the knot: “No social policy is sustainable without a productive apparatus to support it or a macroeconomy to finance it,” she notes. The next government inherits an economy on steroids that faces three uncomfortable questions: how to grow more and better; how to implement a credible fiscal adjustment; and how to stop the bleeding of the public accounts.

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