This year the country’s fiscal deficit will be almost 6 percent of the Gross Domestic Product (GDP). It will be the highest deficit since the end of the 1980s. I think this high deficit is very unfortunate for several reasons. First, because it constitutes a countercyclical policy: while in the pandemic with a contraction of the economy of more than 8 percent it was decided not to implement any fiscal impulse, now when the Ministry of Finance expects growth to be between 2.5 and 3.4 percent percent, that is, above the potential growth rate of the economy, a huge deficit is proposed: fiscal policy seems to follow the political cycle more than the economic cycle. Second, because the deficit will not be allocated to public investment but to current spending. And third, because it is decided to put the country into debt in an environment of very high interest rates, which will increase the cost of debt service.
That said, considering the low levels of debt as a percentage of GDP (last year this ratio closed at 47 percent, which is a low level for an emerging country) there was room to incur this deficit without causing disruptions in the markets. In fact, country risk, measured either as the rate differential on long-term bonds between Mexico and the United States or as the cost of insuring the country’s sovereign debt, has not increased significantly since the program was announced. tax for this year.
It is evident that it is essential to implement a fiscal consolidation program to reduce the deficit. Otherwise, in a few years debt levels could be reached that would compromise the investment grade sovereign rating, which would increase the cost of financing for the government, companies and families. The crises experienced in the country in the seventies and eighties were largely caused by trajectories of high deficits like the one we will see this year. I am convinced that this fiscal consolidation must be one of the priorities of the next federal government. The Ministry of Finance has communicated that the fiscal deficit must be reduced by around 3 points of GDP next year. It has been mentioned that the adjustment would occur fundamentally through a reduction in public spending and not through increased revenue. I believe that making an adjustment of this magnitude in a single year would be a mistake. Firstly, because a reduction of this magnitude in public spending could lead the economy into a recession and secondly because there would be a risk of not achieving the goal, which would damage the credibility of the government in the markets, which in turn would increase the financial volatility and would make it more expensive to contract new debt.
It would be a better strategy to announce that the adjustment would be implemented in two or three years in such a way that the impact of lower public spending on the economy is reduced and the credibility of the authorities is not put at stake. In addition, the announcement should be accompanied by a program to increase tax collection. We must not forget that Mexico has the lowest collection rate in the Organization for Economic Cooperation and Development (OECD) and one of the lowest in Latin America. The next government should increase collection through a reduction in informality and evasion. Otherwise, the necessary investments in education, health and infrastructure that the country needs will not be made.
An announcement of a two or three-year fiscal consolidation plan would be well received by the markets. If it is also accompanied by a credible strategy to increase collections, it could even result in lower interest rates on future debt placements. The new federal administration has time to change the action plan.
