Fiscal Changes Not Enough to Sustain Mexico’s Economic RecoveryBy Cinthya Alaniz Salazar | Tue, 09/21/2021 - 11:53
The recent moves to close tax loopholes outlined in the administration’s fourth annual economic package to congress may not be enough to ensure Mexico’s sustained economic recovery because structural hurdles continue to add up.
Although the new Finance Minister Rogelio Ramírez de la O presented fiscal modifications aiming to strengthen the tax code, these changes may fall short in the face of the inflamed vulnerabilities. The Minister focused on providing certainty to tax collection by closing loopholes and restricting discretionary interpretations of several relevant laws. Furthermore, the Minister recognized the need to move away from the administration’s fiscal orthodoxy, establishing that a fiscal deficit between 0.3-0.4 percent was adequate. Although these measures will improve fiscal margins, they alone will be insufficient to carry the country’s economic recovery into the next year.
The Mexican economy has repeatedly exceeded recovery expectations after its economy took a startling 8.3 percent nosedive in 2020—the largest drop in GDP since the Great Depression. Currently, the country is expected to close the year with a 6.3 percent rebound, one of the strongest in Latin America but will still be carrying a 2.4 percent deficit into the next year. Furthermore, projections by the IMF state that macroeconomic growth projections stand at 4.2 percent, but preexisting vulnerabilities exacerbated but the COVID-19 pandemic may thwart its current momentum.
A fiscal interventionist approach ay the beginning of the pandemic, may have lessened both the country's dramatic economic contraction and preexisting vulnerabilities. At the time the executive branch had justified its frugal approach saying that the crisis was "temporary, transitory" and that normality would return soon. Now, as the country approaches the second-year anniversary of the pandemic, Mexico finds itself grappling with heightened poverty levels and elevated public debt in a global environment underpinned by uncertainty and high inflation.
Findings from the independent technical council CONEVAL show that almost 4 million Mexicans were shoved into poverty, while an additional 2.1 million were pushed into extreme poverty. Moreover, some 900,000 Mexicans lost access to education and the number of those lacking access to healthcare rose from 15.6 million to 35.7 million with the end of the Seguro Popular insurance program that provided access to 52 million people. These outcomes are a direct result of an almost nonexistent fiscal response to the pandemic, which in turn is now putting a strain on public spending as the public demands enhanced pensions and social programs.
The barriers that had served to stabilize and protect the economy from serious shock have disintegrated before the pandemic. Mexican authorities have seen themselves obligated to reorient trust funds to address the health emergency and extreme weather events, thereby leaving the country without a safety net. Ramírez de la O’s fiscal reorientation is promising and well timed; however, the outlined vulnerabilities will play a role on how successfully the country’s economic recovery plan unfolds.