The dependence of state and municipal governments on resources from federal transfers is still extensive, they currently represent an average of 80 percent of their income.
For their part, these transfers come largely from the resources collected by the federation, hence when the collection falls, the so-called subnational finances (precisely those of the states and municipalities) are affected, due to the consequent reduction in the resources assigned. .
The Center for Economic and Budgetary Research (CIEP) prepared an analysis called “Instability in Participable Federal Revenue. Repercussions on federalized spending”; The agency indicates that at the end of the first half of the year, budget collection was lower than expected, and it is expected that by the end of 2023 this item will be 1.8 percent lower than the estimate in the Federal Income Law.
Because of this, so far this year the entities have received 28 thousand 554.4 million pesos less than what was approved for participations and contributionsthe two most important components of federalized spending.
In other words, lower federal revenue translates into lower Participatory Federal Revenue (RFP), which is the main source of resources for federalized spending.
As a consequence, subnational governments have a smaller budget to carry out public policy in the short term: fewer social programs, fewer resources for works and services, and possibly more indebtedness.
In the analysis prepared by the CIEP, it is mentioned that in the framework for 2023 a growth of the Gross Domestic Product (GDP) of 3.0 percent was estimatedan average inflation of 4.7 percent, as well as an average interest rate of 8.95 percent.
Nevertheless, Although in the first half of the year the economy has grown close to the forecast of the General Criteria of Economic Policy (CGPE) 2023, the collection was 5.2 percent lower than expecteddue to the low perceptions of Value Added Tax (VAT) and oil revenues.
The RFP is mainly made up of two sources of income: tax and oil. These tax revenues contemplate the Income Tax (ISR); Value Added Tax (VAT); Production and services (IEPS); Foreign trade; Mining Rights and Other Tax Revenues.
For its part, oil revenues are made up of 80.29 percent of the income received from the federal government, referred to in article 2 and 93 of the Federal Budget and Fiscal Responsibility Law (LFPRH).
The risks of collection
Once the collection bases are known, it is important to point out that there are associated risks that could determine a lower amount collected, as has happened up to now.
The CIEP points out in its analysis that the main component of uncertainty is the macroeconomic framework which, if unrealistic, may have negative repercussions on the estimated collection.
For example, oil revenues are affected by the projection of the price of a barrel of oil, while GDP growth and the interest rate, among other variables, influence the collection of tax revenues.
The analysis also indicates that the price of the Mexican oil mix, in addition to being volatile, has a direct impact on transfers from the Mexican Petroleum Fund (FMP). The role of this fund is key not only for the RFP, but also for the resources of other funds.
collection unit
The relevance of funds and fiscal items as relevant as the RFP is obvious when it is known that the budget approved for 2023 for federalized spending depends on 54.3 percent of the RFP.
This means that more than half of the transfers to the federal entities fall on volatile income that is estimated will not be fulfilled in 2023.
Participations are the component with the largest budget of federalized spending: in 2023, they represent 50.1 percent. The fund with the largest budget is the General Participation Fund (FGP) and is directly linked to the RFP, since it represents 20 percent of it.
The analysis prepared by the CIEP experts details that, as of the first semester of 2023, the participations have not complied with the schedule. In this period, 662 thousand 597 million pesos should have been delivered for this concept. However, only 622 thousand 960 million have been delivered, that is, 6 percent less than what was approved. In total, 39 thousand 637 are owed
million pesos for shares.
Consequences
The current fiscal coordination implies that federalized resources represent more than 80 percent of subnational revenues; therefore, given the drop in collection, the states have received fewer resources.
However, the situation is different between entities; 22 states have received fewer resources than expected, among which Zacatecas, the State of Mexico and Guanajuato stand out with reductions of 7.4, 6.6 and 5.5 percent, respectively.
In contrast, Mexico City, Baja California Sur, and Quintana Roo have received greater resources at 14.1, 10.9, and 6.7 percent.
The fact that 22 states are not receiving the resources they expected has important repercussions in the realization of public policy at the subnational (state) level.
To remedy the situation, the states could resort to the Federal Entities Income Stabilization Fund (FEIEF).
The problem is that said fund was used in 2019 and 2020, and currently, its balance is only 22 thousand 942 million pesos, which is insufficient to compensate for the fall in participations.
Therefore, it is very probable that the state governments will have to resort to contracting debt, cuts in their public spending or an increase in local revenue to obtain more resources.
The CIEP recommends that the macroeconomic estimates in the General Economic Policy Criteria 2024 be realistic, both for the federal government and for subnational governments.
The foregoing in order that the expected income and expenses give certainty to the public policies that will be implemented in the three orders of government.
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