Mexico showing higher tax revenue, smaller deficit

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Thursday, December 1, 2016

Mexico saw higher tax revenues and produced a lower deficit in January to October compared to the same period last year, an indication tax reform is carrying out its intended purpose and that public debt seems to be deteriorating less rapidly.

The details, released Wednesday under the finance ministry's new reporting scheme introduced this year, show government income rose 13% year-on-year in the first 10 months of 2016 with non-oil tax income rising 10.8%. This helped to offset historically low oil prices this year.

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The shift suggests the 2014 tax reform, a cornerstone of the Mexico's sweeping structural reforms, appears to be working, nudging the tax burden away from state-oil company (Pemex) revenues and onto the private sector.

Meanwhile, the growth in the public deficit over the period reached 222bn pesos (US$10.9bn), compared to the 490.5bn pesos in the first 10 months of 2015. This is in line with a reduction of spending from 3.5% of GDP to 3.0% of GDP, as projected by the ministry in August.

However, public spending did rise over the period, up to 4.1tn pesos, or 3.6% above 2015, and total public debt reached 9.67tn pesos, or 47.3% of GDP.

The ministry has said it sees that rate rising to 50.5% by year-end. The rising percentage of debt versus GDP has banks, NGOs and ratings agencies concerned.

In an effort to respond to spiraling public debt, the government passed the 2017 budget this month with 240bn pesos in reduced spending compared to 2016 – 100bn of which is drawn from cuts at Pemex.

This week, finance minister José Antonio Meade reiterated his confidence that the government can meet its budgetary goals next year, producing a primary surplus of 0.4% (the first surplus since 2008), despite widespread concerns that US president-elect Donald Trump's actions in office will have dire impacts on trade, immigration and remittances that could cause a crisis with the peso and a steep decline in economic activity.

In the first 10 months of the year, 34% of spending went to pay financing costs on the debt, federal to state contributions and pensions – all together costing 1.43tn pesos from January to October.

Payouts on pension benefits rose 4.7% y-o-y in the period to 525.1bn pesos; furthermore, pension benefit payments are projected to rise 112% from 2007 to 2017, as Mexico's population ages and workers continue to retire under the pre-Afore regime.

Debt payments rose 16% y-o-y in the period to 321bn pesos.

According to José Luis de la Cruz, quoted by El Economista, debt growth and peso volatility could drive debt costs 2.8% of GDP higher than the government target by year-end.

"It is indeed becoming a problem, because it absorbs more resources than a great many government branches," said De la Cruz. "This aspect is serious, above all when you have an economy that is growing little and there is no recovery in oil income."