Good and bad of the fiscal certainty agreement

MEXICO - In Brief 28 Feb 2014 by Mauricio González

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Today,after a meeting of a special government Committee for a “Prosperous Mexico”, specialized in economic policy and formed by different government ministries, the Secretary of Finance, Luis Videgaray, announced a “Tax Certainty Agreement”. This agreement pursues several goals. Amongst them, the most relevant in our opinion, are: · No further tax changes until November 2018, except for extraordinary and/or significant macroeconomic shocks. · Timely and efficient exercise of public spending. · A periodic reduction of the public sector deficit. These messages are positive, since they reduce private sector uncertainty regarding tax policy, particularly on the possibility of structure changes in the Value Added Tax. By postponing a tax increase until the end of 2018, most likely the VAT will not be further modified for the rest of this administration (once more). At the same time, the government tried to convey a message that its willing to accelerate a much needed public spending in order to re-invigorate domestic demand and GDP growth. Public spending published figures show significant real growth (20.2% in real terms last December, on annual basis, which includes a capital spending increase of 116% Dec/Dec). No official figures on government spending are available for 2014, however the economy shows no significant domestic demand impulse or abundant liquidity. This has caused significant confusion for firms and households, that have started to question the viability of the official annual GDP real growth for the year as a whole. The margin of maneuver for the government has been reduced by the Minister’s announcement. If January’s government spending does not validate ...