Economics: Despite a lower deficit, public spending structure and fiscal rigidity complicate the outlook
Last week’s report on public finance for the first quarter of 2022 showed relatively favorable results from some revenue and spending components that allowed the total public deficit to fall a real 25% at the same time as the primary surplus widened a real 61.2%. The report revealed substantial recoveries in oil and tax revenues, with the former benefiting from the rise in oil prices and the latter from higher levels of income tax collections and revenues from public sector entities and companies.
But not all the news proved to be favorable. Sluggish consumption levels have led to a significant fall in VAT collections while excise tax revenues plunged 58% largely owing to the decision to use fiscal policy to keep a lid on gasoline and diesel prices.
The report reaffirmed a deficient evolution in the structure of spending, especially in the case of physical investment, which has been weighted almost exclusively toward the current administration’s highly questionable infrastructure projects (the new airport near Mexico City, the Dos Bocas refinery, and the Maya rail network in the Southeast of the country). It also confirmed the continuing insistence on injecting massive funding into unproductive public companies (Pemex and CFE) and into AMLO’s signature social programs. Jointly, these commitments pose major problems for public finance going forward.
AMLO’s "republican austerity" campaigns combined with the refusal to reform the tax code have locked the government into a pattern of fiscal rigidity that leaves little-to-no room to change course in response to future revenue shortfalls. The report also confirmed mounting pressures on non programmable spending under the weight of rising debt service costs and higher revenue sharing with state and municipal governments.
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