Economics: Risks for 2020 public finance stability
The problems posed by the strict austerity the government of Andrés Manuel López Obrador has pursued as it strives to sustain its deficit and public debt targets were on clear display not only in public finance results through the first nine months of the year, but also in the 2020 federal spending bill the Chamber of Deputies passed Friday.
The administration’s budget leaves the federal government with scant financial room in which to address public service needs, which have already been stretched to alarming degrees as a result of the sharp cuts to numerous agencies and programs, a problem compounded by a pronounced penchant for underspending, poor spending choices, and other mistakes on the level of public administration. The inefficient allocation of funds directed specifically at the administration’s priority social programs has impaired the economic stimulus capable of boosting domestic production. This approach will impose steep costs and may well pressure the government to change course and expand spending in the near future.
Those pressures are already apparent in the government’s decision to increasingly draw from the Budgetary Income Stabilization Fund (FEIP, for its Spanish initials), and pass reforms expanding the fund’s purposes to include countercyclical spending, an approach that poses multiple problems of its own.
So, while the government appears on track to achieve its goal of a 1% primary surplus by year’s end, we expect it will fall short of its objective of restricting Public Sector Borrowing Requirements to 2.5% of GDP. We calculate they will rise to 2.7% by year’s end as the raid on Fund proceeds will draw down public financial assets – yet another source of risk to the country’s debt ratings. In the third quarter, 32.35 billion pesos of such proceeds were used, leaving 117.25 billion to be spent in the fourth quarter of the year, or 45.1% of the FEIP balance as of September 30. That leaves little slack for next year when conditions might worsen further.
Rather than chasing a countercyclical boost through spending on programs with little-to-no potential contribution to the sort of productivity growth revival essential for enticing new productive investment, the government should focus on contributing to an atmosphere of greater certainty.
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