Economics: Complex outlook for public finances in 2022 with poor expense structure and growing financing needs

MEXICO - Report 16 Aug 2021 by Mauricio González and Francisco González

Recently released government data on public finances gives a preview of the economic package that will be sent to Congress in early September. Based on the evolution of public finances in the first half of 2021, the trends in revenue, expenditures, and deficits indicate a budget deficit 21.7% lower than the previous year and below the 32.5% drop programmed for the period; a primary balance 70.9% higher than the first six months of 2020, as a result of a substantial recovery of oil revenue and non-tax revenue; and stability in fiscal revenue, albeit with a paltry 1.1% increase in real annual terms.

All this occurred in the context of 4.1% growth in total net expenditures in the first six months of the year, particularly in programmable spending, which was partially offset by the reduction in non-programmable spending.

Despite tax authorities’ best efforts through significant pressure on the big tax payers, income tax collection dipped a slight 0.9% in real terms. However, public sector budgetary revenue grew 7.3%, driven by the oil sector.

Programmable spending increased 7.7%, attributable to the 5.8% growth in current spending and 122.4% rise in financial investment, most of which corresponds to the federal government's contributions to Pemex. In contrast, and as has been the case throughout the current presidential administration, direct physical investment fell, this time an annual 8.3%.

In general terms, poor management of public finances persists, with the intensive use of non-recurring revenue and an expense structure that does not meet basic needs. The complex outlook for public finances in 2022 anticipates even higher pressure on large taxpayers to boost collection levels and support growing financing needs. Thus, for next year, we anticipate a mixed-yet-difficult fiscal revenue and expenditure package that involves reduced revenue margins, with administrative changes to increase tax revenue, poorly allocated spending with high potential pressures, and growing needs for public sector financial resources.

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