The elected president of Mexico, Claudia Sheinbaumwill face the unenviable task of fulfilling campaign promises to boost social programs, even after an election-year spending binge by his predecessor raised the budget deficit to its highest level since the 1980s.
After earning the trust of investors with strict spending policies for most of his term, President Andrés Manuel López Obrador opened his wallet in his final year in office to finish flagship infrastructure projects and cover an increase in programs. welfare for the poorest.
That pushed the deficit to 5.9% of gross domestic product (GDP) in 2024, from 4.3% in previous years. These measures will force the incoming Sheinbaum administration to maintain the limit on spending or risk affecting Mexico’s credit solvency.
According to economists, analysts and former high-ranking officials in Mexico, the solution for Latin America’s second-largest economy is some kind of tax reform that would increase tax revenue, even though Sheinbaum has said he has no plans to increase the taxes.
Sheinbaum handily won the premiership on a platform to expand his predecessor’s popular social programs, including increasing pensions for seniors and scholarships for students.
Sheinbaum, who will take office as Mexico’s first president in October, has said she will seek to reduce bureaucracy and improve the efficiency of tax collection at customs, among other proposals, but has stressed that she is not planning a tax reform.
“In principle no, I am not thinking about a profound tax reform, I think there are still many opportunities for collection,” Sheinbaum said days before the elections in a televised forum.
Just the cost of pensions, public debt service and transfers from the federal government to support the states represented more than half of the country’s budget of 9.07 trillion pesos (about $535 billion) this year, while the indebted state oil company Pemex is no longer the goose that lays the golden eggs it used to be.
“The challenge seems important,” said former Treasury Secretary Ernesto Cordero. “If they want to finance their proposals and their way of seeing the country, they have to think about how they are going to do it.”
With Mexico’s public finances severely strained and current avenues to increase tax revenue running out, experts suggest the need for changes to the way property and automobiles are taxed, adjustments to corporate income taxes, “taxes “ecological” and royalties from Pemex.
“The issue of tax reform is a discussion we should be having,” said political analyst Fernando Dworak. “Everyone is talking about what they are going to do, but no one explains with what money.”
Nor does economic growth appear to help close any gaps, with the Bank of Mexico projecting a meager 1.5% increase in GDP next year.
The last tax reform dates back to a decade ago, when former President Enrique Peña Nieto raised taxes on higher earners and new levies were imposed on soft drinks, junk food and profits from financial markets.
During his government, López Obrador managed to increase tax revenue by taking drastic measures against evasion and forcing large corporations to resolve tax disputes worth billions of pesos.
That represented a 48% increase in tax revenue in nominal terms between 2018 and 2023, but experts warn that this is not a policy that can be repeated.
“Six years ago there was room for savings on the spending side and for improvements in the State’s collection capacity,” said the former deputy governor of the Bank of Mexico, Gerardo Esquivel, last month at a round table organized by the National Autonomous University of Mexico. .
Now, Esquivel added, the new president will have to find new solutions to a worsening budget problem.
Mexico’s tax collection still lags far behind its peers, amounting to just 16.9% of GDP in 2022, well below the 34% average of Organization for Cooperation and Development member countries. Economic (OECD), of which Mexico is a member.
Even more surprising is that Mexico was below the 21.5% average among Latin American countries.
Political scientist Dworak warned that without the means to pay for an expansion of the social program, the president-elect’s promises are illusions, like “letters to Santa Claus.”
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