President Insists Subsidies Stave off Inflation, Maintain GrowthBy Conal Quinn | Thu, 05/05/2022 - 18:47
President López Obrador insists his policy regarding the Special Tax on Products and Services (IEPS) is helping to manage fuel prices and control inflation. López Obrador noted how the price of gasoline in Mexico is currently 10 pesos lower than that of its neighbor to the north, while inflation sits at 7.2 percent, compared to 7.8 percent in the US and 9.5 percent in Spain. Nevertheless, experts still question the long-term viability of the tax benefits.
However, if the federal government's decision to maintain fiscal stimuli for gasoline and diesel continues while international prices remain stable, research carried out by the BBVA suggests the outcome could be negative growth in the coming months. BBVA’s analysis estimates that a 33.3 percent increase in the international price of gasoline would have an immediate impact on gasoline and diesel, with revenue falling by a quarterly rate of 72.8 percent.
Carlos Serrano, Chief Economist, BBVA Mexico, also highlighted some of the benefits of the president’s proposals, namely the focus on increasing supply and availability of goods. Serrano pointed out that, at first assessment, the main positive is that emphasis is falling on the side of supply and not demand.
"We see it as positive that there are no demand-side measures and that no fiscal restrictions are being considered, for example, which some other countries have proposed... This is attempted through improving distribution logistics and eliminating regulations that do not make much sense. One measure that I think is very positive is lowering tariffs on many goods that have gone up [in price]," Serrano said.
Moreover, he praised the federal government’s efforts to maintain the price of gasoline with subsidies, but noted this measure could prove regressive in the long-run since it benefits the richest 10 percent of the population most: "Subsidizing gasoline is a deeply regressive measure. Eliminating the IEPS entirely is also very regressive... We have to ask ourselves if a permanent policy where we subsidize gasoline for those driving SUVs and pickup trucks is suitable.”
Serrano also expressed skepticism at the possibility of imposing price ceilings on basic products such as gasoline, adding: "This is usually very complicated to achieve, among other reasons because we are dealing with global markets, so it is problematic to think that the price of wheat goes up all over the world and we can contain it here. What will end up happening is that, if [the cost] is lower here, then more will be exported. If you get paid more abroad, you will sell it abroad.”
The IEPS is a tax paid on the production and sale or import of alcohol, beer, gasoline and tobacco. It is indirect, much like the Value Added Tax (VAT), which means that taxpayers do not pay it. Rather, it is passed on by businesses when they charge their customers. The payment of the IEPS is made monthly, no later than the 17th day of the month following the month to which the payment corresponds and must be filed with the tax authority. IEPS must be paid by individuals, self-employed persons or legal entities that sell or import these special goods. The tax is levied on foreign companies that trade on Mexican territory, including those that import gasoline in Mexico with the goal of selling it.
The Mexican government has at times granted incentives on the taxing of gasoline to provide economic support to the domestic oil and gas sector and reduce the final cost for consumers.