Mexico's economic austerity measures prioritise social spending

In accordance with the constitution, every six years the newly elected president of Mexico is required to prepare a National Development Plan (Plan Nacional de Desarrollo, PND) covering the length of his or her mandate. The plan must be submitted to Congress for approval in the early months of the presidency, allowing the incoming administration to set out its vision for the country, as well as priorities for investment and reform over the coming period.

In his third attempt at the presidency, Andrés Manuel López Obrador, better known by his acronym AMLO, was elected to office in July 2018 and became Mexico’s first leftist head of state in modern times. The publication of the PND 2019-24 in April 2019 was thus eagerly awaited as a new point of departure in Mexican governance. A primary target of the latest PND is an economic growth rate of 6% by 2024, which would mean an average growth rate of 4% over the six-year period.

Three Pillars 

In line with the administration’s priorities, the PND makes ethical governance and tackling corruption its centrepiece. It promises a clean break with the preceding neoliberal period and a renewed focus on citizens’ well-being. The PND is structured around three pillars:

• Governance: to ensure justice and the rule of law so that the government is a guarantor of the human rights established in the constitution, and to build a country where law and justice prevail;

• Social: to ensure citizens enjoy the social and economic rights established in the constitution; and

• Economy: to encourage dynamic, balanced, sustainable and equitable economic development that expands the capabilities of all citizens in the near and long term. In addition to tackling corruption, both gender equality, and territorial and sustainable development have been identified as cross-cutting horizontal pillars relevant to all policy areas. Among the flagship government initiatives aimed at tackling poverty, reducing rates of emigration and, more broadly, improving societal well-being are:

• A universal pension for those aged 68 and over, introduced at an initial monthly rate of MXN1275 ($65.93) from 2019; and

• The Youths Building the Future initiative, which aims to provide monthly grants of MXN3600 ($186) to 2.3m people aged between 18 and 29 to enable them to undertake one-year internships in private businesses or public institutions. Key infrastructure projects under the PND include the Maya train, a 525-km train line aimed at stimulating tourism in the Yucatán peninsula, and a multi-modal transport corridor across the isthmus of Tehuantepec to support industrial development. Other notable projects are the Dos Bocas refinery, to be constructed in the president’s home state of Tabasco, and the proposed development of an military airbase in Santa Lucía, which will also feature a commercial airport and serve as an alternative to the now-scrapped $13bn airport planned for the capital (see Construction chapter).

Another important regional initiative is a new free zone along Mexico’s northern border shared with the US. Some 43 municipalities on the frontier will benefit from a reduced value-added tax cut, from 16% to 8%, and a maximum 20% tax rate on income and profits. While the aforementioned projects are important in their own right, all of them were announced before the PND was published. Thus, the PND served more as a means to connect the government’s priorities by way of an overarching strategy rather than to announce significant new projects.

Austerity Mantra 

The current government is committed to increasing social spending, particularly on pensions and training programmes for young people. At the same time, it has committed to avoid both increasing the country’s debt burden and, for at least three years, raising taxation rates. Freeing up resources for social spending, therefore, will result in the curtailment of spending in other areas. The government has made a virtue of this political necessity by introducing a broad-ranging austerity drive. The aim is to root out, for example, corruption in public procurement and to reduce public spending seen as frivolous or unnecessary. Leading by example, AMLO sold the presidential jet in June 2019 and cut the presidential salary by 60%, indicating his strong commitment to maintaining fiscal responsibility. Other measures were more substantive and politically challenging, however. For example, AMLO’s decision to get rid of Prospera, a conditional cash transfer programme, affected those living in more remote areas who relied on such programmes for basic health care provision.

As economic activity slowed further in the first nine months of 2019, the government cautiously freed up spending in order to balance the promise of improved welfare with stagnant growth. In September 2019 the administration released a blueprint for the 2020 budget, in which the primary fiscal surplus was lowered from initial targets to 0.7% of GDP.

Fiscal Impact 

Typically, during the first year of a new administration in Mexico, even when there is no switch in political party, the change in personnel and policy leads to a slowdown in government spending as the new administration assumes office and works to develop its strategies. Given that the latest change in leadership also meant a change of political parties, the slowdown in public spending during the early days of AMLO’s administration was expected to be greater than usual, exacerbating the impact of the austerity policies on headline metrics.

In the first half of 2019 government income rose by 4.8% in nominal terms, with an 8.7% increase in tax revenues more than offsetting a sharp 13.3% decline in hydrocarbons income. Meanwhile, over the same period, total public spending declined by 4.5% in nominal terms, with inflation factored in. This was the sharpest contraction in spending in the first year of a new government since 1995, when Mexico was experiencing a financial crisis. Although approved current spending dipped by 1.7%, the burden of austerity and under-execution weighed more heavily on physical investment, which fell by 13.9%. These trends suggest the government will meet its fiscal targets for 2019 and provide a partial explanation for the broader economic slowdown.

Missed Opportunities 

Despite demonstrating a strong commitment to ongoing fiscal responsibility, the PND has been criticised by many analysts for its lack of a structural reform agenda and limited focus on institutional development. One institution that could have benefitted from further development is the National Anti-Corruption System, an initiative founded by the previous administration, which required further funding and more political support to take root. Given the focus of the new government on tackling corruption, it is perhaps surprising that few significant measures were envisaged to build on this nascent institutional legacy. Far from setting out an agenda for further structural reforms, the PND represents a conscious break with the approach of previous administrations, instead emphasising social well-being. Further demonstrating the government’s new approach is its moves in the energy sector, where an important structural reform introduced by the previous administration was reversed.

Petróleos Mexicanos (Pemex) and the Federal Electricity Commission, the state-run oil and electricity companies, respectively, are assigned central roles in the PND 2019-24, signalling a return to the model in place around the middle of the 20th century. Arguably, sector strategies – such as the Pemex business plan (see Energy chapter) – as well as the government’s fiscal strategy and allocations to PND priorities will ultimately be of far greater consequence than the PND itself.

AMLO is not the first Mexican president to set out aggressive economic growth targets at the beginning of his six-year mandate. Nonetheless, given that economic growth has averaged less than 2.5% over the past three decades, it is hard to foresee an acceleration from the anticipated 1.6% growth in 2019 to as high as 6% by 2024. Moreover, many international institutions such as the IMF and the OECD stress that further structural reforms, building on those of previous administrations, will be necessary to drive the productivity growth needed to underpin a significant re-acceleration in the economy more broadly. Such reforms are absent from the PND, and run counter to the actions of AMLO, who has in the past railed against what he has called neoliberal reforms. In the absence of a re-acceleration in growth, tensions are likely to emerge given the conflicting priorities of fiscal discipline, aversion to taxation hikes and government expenditure plans envisaged under the PND 2019-24 framework.