Mexico remains trapped in a vicious circle, characterized by an increase in public spending, but without a proportional growth in income. This factor is even more worrying in the face of the Economic Package proposed for 2024, in which a historic debt is proposed due to the increase of spending, without there being a counterpart in income, said the Center for Economic and Budgetary Research (CIEP), when presenting its analysis of the economic program for the following year.
Revenue, the same as in 2018
According to the CIEP, official figures indicate that for the following year it is planned to collect from the public treasury around 7.32 billion pesos, which are public income similar to that of 2018so it is clear that we are facing a lost six-year period in terms of public income.
“If this is not evidence that we need tax reform, then what is?” said Alejandra Macías, general director of the CIEP.
According to the analysis prepared by the centerbudget revenues of 7.3 trillion pesos are 1.8 percent less than those of 2023which is equivalent to 21.3 percent of GDP.
Said amount and percentage is similar to the 21.2 percent of GDP captured in 2018 and, In terms of GDP, it would be the lowest collection since 2019.
The CIEP points out that, compared to 2018, tax revenues would grow by just 1.7 percentage points of GDP and energy revenues would decrease 1.4 percentage points; which implies greater tax dependence and less energy.
Regarding tax revenues, A strengthening has been observed in ISR collection, but fiscal expenditures on VAT and oil IEPS have limited this progress.
The drop in oil revenues expected for the following year also contributes to the reduction in national income. In part, because the oil income will no longer enter the government’s coffers, but will remain in the Pemex stock market, removing obligations from the oil company to transfer resources in an effort to provide it with liquidity.
The CIEP says that we should no longer postpone a tax reform, not even discuss it, but carry it out, since discussions and debates have been recorded for a long time, but no action is taken.
And tax reform is urgent because there are no certain and sustainable sources of short and long-term income that allow confront the huge increases in spending and debt proposed in the economic package for 2024nor for the commitments that future generations will have to face as a consequence.
On the other hand, the economic program for 2024, presented last Friday to Congress, generates concern and uncertainty for several reasons. To begin with, it is a package that does not incorporate the intergenerational perspective at all; That is, there is no vision for the future of the youngest, and even those who have not yet been born, the CIEP noted.
The factors of concern
- Excessive debt is of great concern. The debt that will be registered in the 2024 Economic Package is of great concern to the financial community, especially because it is allocated to the payment of pensions, without there being certainty that we will grow as it should (at the rate that is being assumed), to finance this enormous expense in the years to come. That is to say, the increase in current spending grows without a certain counterpart. The enormous risk is that, in the end, the debt or the debt indicator will not remain as stable as they are indicating.
- It is worrying that the health sector, the education sector, the care system and the environment are still not priorities of the government and, therefore, we continue to remain in debt to all these sectors and to a part of the population. Above all, with women and with the youngest.
- There is concern that income is going down, with a Value Added Tax (VAT) that is not being recovered, with oil income that is going to stay in Pemex and with Stabilization Funds that are well below the levels as we begin the six-year term.
- It is worrying that we are spending a lot to pay or try to reduce Pemex’s debt without thinking that we need to make a fair energy transition and that we have to address the problems of climate change that we are all experiencing.
Based on these concerns and the analysis that was carried out, the CIEP considers that the Economic Package for the following year presents debts that still prevail and that we would have to be making structural changes, deep, urgent changes, so that these debts can be addressed.
Optimistic macroeconomic framework… thanks to the external sector
Regarding the macroeconomic framework presented in the economic package, Dr. José Luis Clavellina Miller, research director of the CIEP, recognized that it is an optimistic framework, but based on the flows from abroad that will supposedly arrive in the country, such as those generated due to the relocation of investments, nearshoring.
However, The assumptions of austerity and balance with which the budget is prepared are actually quite debatable.
For example, the expected growth of 2.6 percent for 2024 is above the economy’s potential, located at 2.39 percent, and above practically all expectations of the private sector and analysis houses.
Another factor against is that 19.2 pesos out of every 100 will come from financing, against 14.3 pesos in 2023. Furthermore, the boost to spending and public debt proposed for an election year put the sustainability of the fiscal system at risk.
The next administration and future generations will have to address the problem generated by this economic package. They did not want to promote such spending even in the year of the pandemic.
Historical debt
A historical debt of 5.4 percent of GDP is proposed, when a year ago it had been proposed to be 2.7 percent, it practically doubles, which will mean that the Historical Balance of Fiscal Requirements of the Public Sector (SHRFSP) will be 48.8 percent under three assumptions:
a) Primary deficit starting next year
b) Peso appreciated against the dollar
c) Interest rates at half of current ones
To achieve this stability, several assumptions must be met in which there is no certainty, even though today they reflect a certain trajectory.
However, a year ago it was proposed to stabilize the SHRFSP at 49.4 percent of GDP and with the change in methodology this level should have been placed at 48.5 percent.
Historical spending, but with debt
The spending will also be historic, it will exceed 9 trillion pesos, up 4.3 percent compared to what was approved for 2023. However, 80 percent of the budget is practically committed to: contributions and participations to entities, Pemex, CFE, IMSS, ISSSTE, Pensions and Cost of Debt.
Thus, there is very little space left to make public policies. One of the great increases in spending is pensions, even above health.
But pension spending is unprecedented.
According to CIEP figures, 22% of total net spending is for pensions and, given the characteristics of the program, inequality among the older adult population is perpetuated.
The average annual expenditure on pensions per capita of the CFE is equivalent to 6.6 times the average annual expenditure on pensions of the IMSS and 29 times the Pension for the Well-being of the Elderly (PBAM).
By distributing the two trillion pesos proposed for pensions with information from the ENIGH 2022, It turns out that the highest income decile receives 4.6 times more pension resources than the lowest income decile.
It is necessary to make profound changes to the pension system to make it more egalitarian and with a gender perspective, as well as find sustainable sources of financing.
Implications
- Due to all of the above, there are serious implications for the country:
- Fiscal space falls 60 percent, more than half of what we had last year, which leaves practically no resources to carry out truly innovative and transformative public policies for the growth and development of the country. We went from 5.4 to 0.9 percent of GDP.
- It is an economic package in which debts prevail, which will be inherited to the following generations.
- The largest debt will be in the health system, in fact, it will be one of the great pending issues of this administration.
- The other debt is with children and youth, especially by not closing the learning gaps that were generated by the Covid-19 pandemic.
- The debt to women for not recognizing historical lags in every sense.
- The debt with the environment, with its medium and long-term implications.
And of course there is a great risk of unsustainability since, although the debt indicator is supposed to be maintained, in reality many things are hidden. We allocate more and more resources to paying debt. There is a clear decline in transparency and that is very serious.
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