Economics: The state of subnational public finance and why 2022 could pose major challenges
As we continue our analysis of the 2022 federation budget, this week we turn our attention to how it might impact the finances of local governments as well as what has been achieved in roughly five years of efforts to bring some discipline and visibility at that level. The Fiscal Discipline Law on States and Municipalities enacted in 2016 has made it possible to achieve greater transparency surrounding the public debt of subnational governments and led to an alert system for determining potential credit risks and annual caps on indebtedness. Judging by the latest readings of those same indicators, we can see that since 2016 there has been no increase in the indebtedness levels of states that had become a source of considerable alarm at that point. We can also see that despite the strains of the pandemic and economic contraction of 2020, most states continued to respect the Law’s restrictions, with only a few setting off alerts.
There remains, however, considerable room for improvement in this system and a need to complement existing criteria with others, such as those employed by the National Banking and Securities Commission, to achieve a greater degree of precision in the indicators used on the state and municipal levels. It will become all the more important to better monitor this type of debt starting next year because the 2022 spending bill proposes reductions in the amount of money to be transferred to states in the form of conditional (participaciones) and unconditional (aportaciones) transfers that have long accounted for the bulk of local government budgets. We estimate that for next year there will be a real 15.4% reduction in unconditional revenue sharing compared to what was budgeted for 2021, which will come on top of a 7.2% real-term reduction in such transfers during 2020. Similarly, we anticipate a real 1.6% decrease in conditional transfers compared to 2021.
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