Economics: The Economic Toll of Budget Cuts
The reductions in public spending that have been concurrently announced by the Ministry of Finance have always been deepest on the level of investment and only marginal in the case of current spending. Those announced for 2016 were no exception, with much of the cuts taking the form of the postponement or outright cancelation of infrastructure projects such as the building and maintenance of roads.
It is significant to note that the reduction in investment spending has been greater than what was programmed, at the same time as current spending has been unaffected despite promises to the contrary. This could suggest that there are simply fewer obstacles to eliminating investments than there are to curbing current spending, which includes a number of inertial commitments, independently of whether such expenditures are efficient.
We estimate that the public sector has ceased to invest annually, on average during the past three years, the equivalent of 1.0% of GDP.
The fact that the cuts have mainly been concentrated in reductions to investment spending has had costs for economic growth and employment. It is estimated that reductions in public sector gross fixed capital on the order of what the government is implementing reduced Mexico’s real GDP by approximately 0.35 points each year.
In this week’s “Economic Outlook” section, we analyze the extent to which cuts to public investment affect GDP and job growth.
In other news, last week officials reported that the Consumer Price Index (CPI) recorded a 0.34% decrease in prices for the first half of April compared to the second half of March. We at GEA had forecast a similar rate (-0.40%) as opposed to the market, which anticipated less of an easing of inflation (-0.24%).
The decrease in the headline rate during the first two weeks of April reflected, above all, declines in the prices of fruits and vegetables (-3.76%), energy prices (-3.14%), and prices regulated by the government (-0.66%).
On a 12-month basis consumer inflation ended the first half of the month at 2.60%, the lowest rate for the first half of April since officials began reporting inflation data on a bi-weekly basis (1989). The benign year-over-year rate was largely the result of a drop in the prices of livestock products, led lower by an especially pronounced reduction in the price of eggs (-21.96%). This last result contributed to there having been only a moderate increase in the cost of the basic basket of consumer goods, which rose a mere 0.74% compared to a year earlier, when the basket increased in price by 3.13%.
Factory payrolls in Mexico turned in yet another positive performance in February, although the report marked an extension of the loss of momentum seen in recent months. The number of people employed in manufacturing enterprises grew at a 12-month rate of 2.6% in February, a result below the 3.2% increase reported for the same month of 2015.
We should note that the pace of growth in factory payrolls slowed in the four most recent months for which data is available (November 2015 to February 2016) to an average 12-month rate of 2.6% as opposed to the 3.2% level sustained between January and October of last year.
This recent period of slackened hiring corresponds to months in which growth in manufacturing exports slowed considerably, and February was no exception.
Now read on...
Register to sample a report