Focus on reevaluating Mexico's financial commitments

Mexico desperately needs to reevaluate its fiscal practices, including its approach to borrowing, spending, and taxation.

Focus on reevaluating Mexico's financial commitments
Making fiscal policy more dynamic is the key to emerging from crises. Photo by Towfiqu barbhuiya / Unsplash

Alejandra Macas Sánchez, the Executive Director of the Center for Economic and Budgetary Research, said that Mexico doesn't have enough money to give everyone their rights. Without fiscal reform, it's important to review spending commitments like pensions, the cost of the debt, and federalized spending.

Participating in the University Seminar on the Social Question (SUCS), of the UNAM, with the topic of State fiscal capacity in Mexico, she explained: in 2023 it is planned to have revenues of 7.1 trillion pesos; that is, an increase of 10 percent compared to what was approved in 2022. "But we know that this year there have been tax efficiency policies that have made revenues increase. If we make an estimate, the increase will be 0.8 percent real."

It is necessary to be cautious because "this is being calculated based on a three percent growth perspective and with a four percent inflation rate." In Pemex, it is expected that income will not be as high as this year because the price of oil could decrease; that will be seen, according to the global situation, the war between Russia and Ukraine, as well as the agreements in the Organization of Petroleum Exporting Countries regarding the supply of fuel. "We expect to bring in 1.7 trillion pesos from the energy sector."

The economic package proposes to spend 8.3 trillion pesos. But "if we remember the income figure, then we already have a large budget deficit," explained Macias Sanchez. In federalized spending, i.e., that destined for states and municipalities, 2.4 trillion pesos are planned. This is followed by pensions, the cost of debt, and energy. "Those four items are unavoidable expenses; we cannot leave them out."

What follows is what we could call fiscal space, where resources can be allocated to health, education, security, the environment, and everything else we need. However, when the 7.1 trillion in revenues are subtracted from the unavoidable expenses, two percent of the gross domestic product (GDP) is left to finance other aspects.

Debt payment is one of the aspects that concern us the most because we have high inflation and monetary policy increases interest rates, so the cost of debt is increasing; in 2023, it is projected to be 30 percent more than in 2022. "This represents a pressure on public finances that leaves us little room for maneuver to do other things, and it is going to keep growing because we keep getting into debt."

If we do not make changes today to invest more in future generations so that they have more opportunities, are more productive, and contribute more to the fiscal system, the system's sustainability will be jeopardized.

Macroindicators are recovering little by little. Let's hope so and that the outlook is more positive than what has been thought two months ago, but "the fiscal space continues to suffer." Two percent of GDP as "room for maneuver" is equivalent to 627 billion pesos, 1.5 percent less in real terms than in 2022. There are fewer resources to even innovate in public policy.

Budget revenues are expected to grow 10 percent compared to what was approved, but unavoidable expenses will grow 11.2 percent. There is a discrepancy here: "either you stop spending on some things or you get into more debt".

Mexico urgently needs to review spending commitments

"Just because they are unavoidable does not mean they cannot change; if they are not, the next generation will pay for it, and we are giving them little opportunity to grow." "For example, young people who are entering the workforce must pay for the pensions of the previous generation and save for their own, and, in addition, with low salaries."

A fiscal reform, which is a whole package that looks at how we get into debt, how we spend, and how we pay taxes, needs to be thought about.

In addition, the budget must have a gender and intergenerational perspective. Alternatives must be sought for fiscal reform in 2024–2025 because, without it, the risk of unsustainability grows. If we do not do something, the pension "pump" and the debt will continue to grow; if we do not review these spending commitments, we can get into a lot of trouble later on.

Commenting on the presentation, José Ignacio Casar Pérez, a researcher at the National University's University Program for Development Studies, said: "If we do not want to increase income, we cannot increase spending either." This translates into the second group of aggregate or composition problems: the supply of public goods deteriorates and their composition moves in a direction that does not help to improve welfare.

An example is an education, where real spending has been falling and what remains is the "plain and simple" payroll. It is said that the big expense is scholarships, which means that there is nothing left for other programs related to educational quality. "Not only are there fewer resources per capita, but these services are deteriorating because there is no training, infrastructure, etc."

Something similar is happening in health. The open population services do not have medicines or vaccines; a smaller number of ailments are attended to, etcetera. He concluded that there is a change in their composition, which implies poorer distribution and quality, necessitating additional investment.