Fuel Subsidies Cost the Government MX$88.59 Billion

The Ministry of Finance reported that Mexico’s IEPS subsidy cost MX$2.88 billion (US$ 148 million) in October, an increase in losses of more than MX$1.6 billion (US$82 million) compared to September. This is the seventh consecutive month that the IEPS reports a negative balance. IEPS collection has amounted to a loss of MX$88.59 billion in 2022. According to the 2022 Economic Package, the finance ministry should have collected MX$415.46 billion (US$21.37 billion).

The Ministry of Finance also published the tax subsidies on fuels for the week from December 3 to December 9, 2022. The subsidies for Magna and Premium gasoline and Diesel decreased.

The amounts of tax stimuli decreased to 31.8 percent, reaching MX$1.75/l (US$0.09/l) for gasoline with a level below 91 octane, to zero percent for gasoline with a level equal to or above 91 octane and to 76.48 percent, reaching MX$4.62/l (US$0.24/l), for diesel. Fuel station customers will be exempted from paying the Special Tax on Production and Services (IEPS) up to these amounts. Globally, fuel prices have started to gradually decrease to levels before the war in Ukraine. Therefore, Mexico’s government has gradually decreased subsidies. The finance ministry increased the amount paid for IEPS in October, however, considering the rising inflation.

According to Energia a Debate, the difference between the losses and the amount that should have been collected equals 1.75 times this year’s health budget. Throughout 2022 the IMF urged Mexico to change its fuel subsidy strategy.  “[Mexico] has largely used untargeted subsidies to mitigate cost-of-living increases, offsetting the windfall in oil revenue streams,” stated the IMF in its report on Mexico’s finances. According to the organization, the measure did soften fuel prices, which mitigated the pressure of inflation on consumers. However, it took its toll on the public budget. Therefore, IMF recommended that when fuel prices rise again, the government should choose measures focused on protecting other areas. “Contingency plans should be prepared for a rapid economic policy response if risks materialize. It would be important to increase fiscal buffers in the short term and reform the institutional framework to achieve greater flexibility in the long term,” said the IMF.

As previously reported by MBN, Paolo Mauro, Deputy Director of the Department of Fiscal Affairs, IMF, said that energy subsidies have been an inefficient way of helping people with scarce resources. He stressed that this strategy is diverting money that otherwise could be directed to the health and education sectors that were highly affected by the pandemic.