Mexico's Fiscal Reform and Economic Package for 2014: Back to Deficit Financing

MEXICO - In Brief 09 Sep 2013 by Mauricio González

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The government announced today a very significant fiscal package for 2014, as well as an ambitious fiscal reform. In essence, both proposals are oriented to increase public sector revenues in order to augment spending in four distinct areas, two traditional and two new ones. The former include more resources for infrastructure and education and the social security novelties are: a retirement pension for all Mexicans above 65 years old (with a monthly income lower than $28,400 pesos), and an unemployment insurance scheme that would provide one minimum wage monthly payment ($1,893 pesos) for a 6 month period.The government plans to raise overall spending by 1.3% of GDP next year (from 24.0% to 25.3%) and to increase overall revenues just 0.2% of GDP (from 21.6% to 21.8% of GDP; oil revenues down 0.3% and non oil revenues up 0.5%). The gap between revenues and expenses would enlarge the Public Sector Borrowing Requirements (PSBR), from -2.9% to -4.1% of GDP. The latter would be the largest public sector deficit in more than a decade.The government intends to follow a counter-cyclical fiscal policy through a structural deficit in low economic activity years, that in theory should be compensated with a fiscal surplus in high growth periods. official estimates consider the public sector deficit should diminish throughout the years, to a minimum of 2.9% of GDP in 2019. In consequence, overall public debt would augment from 39% of GDP in 2013, to a peak of 41% in 2015 and diminish to 39.6% by the end of Peña Nieto's administration.Markets will probably have mixed feelings about the government’s project, due to some “hair raisers” like the following: i) Structurally changing fi...