Tendencia Económica No. 258

Abstract

Editorial: The reform to Colombia’s General System of Transfers (Sistema General de Participaciones, SGP), enacted through Legislative Act 03 of 2024, establishes a progressive increase in the share of central government revenues allocated to subnational and local governments. Currently, 25% of the current revenues from the General Government’s budget are transferred through the SGP to subnational and local governments, and this share is set to rise gradually to 39.5% by 2038. In the absence of offsetting adjustments to public spending, this increase in transfers would push the fiscal deficit to 3.7% of GDP by 2027, worsening to 5.2% by 2038. However, the implementation of the reform is contingent on the approval of a Law on the Allocation of Responsibilities, which will establish the criteria for distributing functions among different levels of government and support the decentralization of public service delivery from the central administration to subnational entities.

A comparative analysis of Latin American countries and OECD members shows that Colombia demonstrates a relatively high level of fiscal decentralization but ranks lower in the political-administrative dimension of decentralization. Specifically, local government spending in Colombia represents 23% of total government expenditure, exceeding the OECD average of 18% of GDP, which indicates a stronger degree of fiscal decentralization. However, local and subnational governments in Colombia possess comparatively limited political and administrative autonomy. This is evidenced by the Regional Authority Index (RAI), which measures subnational government autonomy on a scale from 0 to 100. Colombia’s score of 15 falls slightly below the OECD average of 16, highlighting its weaker political-administrative decentralization despite relatively greater fiscal decentralization.

The document highlights the importance of developing a new system for categorizing territorial entities, based on variables such as management capacity, poverty levels, and overall development. A more robust classification framework would enable a fairer distribution of responsibilities, better reflecting the diversity of institutional capacities and territorial contexts. This, in turn, would promote a more efficient allocation of SGP resources. The document also stresses the need to establish strong monitoring and evaluation systems that are results-driven and grounded in transparent, publicly accessible, and verifiable indicators. Moreover, it recommends that the Law on the Allocation of Responsibilities incorporate principles of transparency and citizen participation as core pillars of the decentralization model. Ultimately, it concludes that the legal framework must remain flexible enough to respond both to territorial differences and to broader economic cycles, thereby supporting a decentralization process that is effective, equitable, and fiscally sustainable.

Actualidad: In the first quarter of 2025, the Colombian economy registered an annual growth rate of 2.7%, slightly above the 2.6% observed in the previous quarter. From the supply side, this result was driven by the dynamism of artistic activities (15.4%), agriculture (5.9%), commerce (4.7%), and public administration (3.7%), which together contributed 2.4 percentage points to the overall growth. On the demand side, the main drivers were private consumption (4.4%) and gross capital formation (8.2%), the latter explained mainly by inventory accumulation, as investment—measured through gross fixed capital formation—contracted by 0.1%. Regarding the external sector, imports increased by 12.4%, in line with the expansion of private consumption, while exports grew by 0.7%.

Although the overall economic growth in the first quarter of 2025 was positive, its composition from the expenditure perspective reveals a less favorable structure. The greater dynamism of private consumption came at the expense of investment, exacerbating the reconfiguration of aggregate demand observed after the pandemic, reflecting a lower accumulation of capital and constraining the economy’s potential growth. Based on a counterfactual exercise, Fedesarrollo estimated that, had the pre-pandemic composition of demand persisted, GDP would have grown on average 0.5 percentage points more between 2020 and 2025. This result shows that the current composition of growth limits the country’s capacity to reach growth rates close to 4.0% and to advance in job creation and poverty reduction.