Economics: Fiscal and Budget Debates Collide
The presentation of the government’s budget proposals last Thursday prompted a response from business groups looking to propose a “fiscal counter reform” aimed at rolling back some aspects of the major overhaul of tax rules Congress passed in the fall of 2013, better known as the 2014 fiscal reform, and to which business leaders have long objected.
Based on that reform the federal government has significantly expanded tax collections beginning in 2014 thanks to adjustments made to the income tax code and rules governing tax deductions, an upward harmonization of the value-added tax (VAT) rate in the border region with the national 16% rate, as well as the adoption of new excise taxes on sugary soft drinks and non basic foods that are calorie dense. Moreover, the drop in international oil prices implied that the excise tax on gasoline and diesel, which had previously worked as a subsidy, was transformed into a significant source of tax revenues.
Although the increased tax collections helped offset the decline in petroleum-related revenues, it did not impede an ongoing expansion of public debt, so any shortfall in expected tax collections would pose an additional source of pressure on public accounts at a time when officials are left with scant room in which to manage public debt levels.
In this week’s Economic Outlook section we describe the main changes to the tax rules implemented as part of the fiscal reform for 2014 that sparked considerable outrage among business owners, as well as the aspects of the law they will try to negotiate through congressional intermediaries, especially members of Congress from the PAN, as they seek to change some tax rates and rules. We also address the consequences that such changes to tax law might have on government income.
Other economic news last week was less than encouraging, beginning with the industrial activity report for July. In that month output increased at a 12-month rate of merely 0.3%, according to seasonally adjusted data, after having risen 1.1% during the same month a year earlier. Although there was a slight firming of factory output, oil and gas output continued to fall. At the same time, the component of construction related to infrastructure (civil engineering works), was 17% weaker in July than it was a year earlier. That last point of weakness can be explained to a certain extent by reductions the government has made to its direct physical investment budget.
Last week the authorities reported that the private consumption rose during the second quarter a seasonally adjusted 2.3% compared to the same three-month period of 2015, the slowest rate of growth since the 2.1% rise of the third quarter of 2014.
The softening of the headline rate was largely the result of a drop in purchases of imported goods. In fact, readings of consumption of imported goods were very strong earlier in the year but recently have been experiencing outright and pronounced contractions. This change of trajectory comes at a time when the prices of imported goods have been rising, possibly as a result of a pass through effect from the peso’s weakening against the dollar.
On a related note, the 12-month rate of consumer inflation was 2.73% for August, the highest level seen in six months. During the same month of 2015, the CPI rose 2.59% year on year. In an extension of the uptrend in inflation of recent months, consumer inflation has risen in tandem with goods prices. During the most recent month such prices rose at a 12-month rate of 3.76%, considerably stronger than the 2.36% increase registered in August 2015. Among such products both food and non-food goods saw prices rise considerably, with the former category increasing 3.74% year on year (as opposed to a 2.09% increase a year earlier), and the latter by 3.77% (up from 2.59% in August 2015).
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