Hi everyone,
This week, I’m focusing on something a bit different: Mexico’s federal budget for 2024. (If you’re not aware, public finance is my jam — and for reference, my master’s thesis was on the political economy of Mexico’s public finances because I am a big old nerd!) This post will be part of a multi-part series focusing on the budget, its impacts on the election, and what it means for the next president.
I hope you enjoy it. Please feel free to reach out if you have questions about this topic or need more details.
We will be back in a few days with more updates on recent news in Mexico’s election. In the meantime, please share this post and encourage others to subscribe!
Until next time,
Jonathan Terluk
On September 11, Mexico’s Finance Ministry (SHCP) sent its 2024 budget proposal to Congress for approval. In the weeks since the budget was debated in Congress, and on November 6, the lower chamber of Congress, the House of Deputies, approved the package. (Mexico’s Senate does not need to support federal expenditures, only revenue laws.)
Mexico’s budgeting process is relatively straightforward. Over the year, the SHCP delivers several reports to Congress that outline macroeconomic projections, budgeting priorities, and other public finance planning details. In September, the SHCP delivers two proposals — one for government revenue and the other for expenditures —and Congress must approve each by constitutionally mandated deadlines.
Also straightforward for economic policymakers in Mexico has long been a commitment to fiscal discipline. (Admittedly, only the commitment to sound fiscal management is straightforward; achieving this is, in fact, incredibly complex.) However, the commitment to fiscal discipline changed quite a bit in this coming year’s federal budget.
Why? The SHCP foresees the government running a deficit of 4.9% of gross domestic product (GDP) in 2024, among the largest deficits in recent memory. I don’t want to harp on the sustainability of Mexico’s public debt just yet, but I will state upfront that the larger deficit is not necessarily a problem. However, there are a lot of buts.
We will get back to the buts a bit later. Instead, let’s start by looking at the changes in the 2024 budget.
The 2024 budget allocates MX$9 trillion ($512 billion) in government spending. That amounts to approximately 26.2% of Mexico’s GDP.
Some of the critical aspects of the funding bill include:
The 2024 federal budget is significantly larger than that for 2024, which measured about MX$8.3 trillion or approximately 25% of GDP. The 2024 budget represents a 4.2% increase in spending (in real terms).
At a high level, here are some of the key areas where the 2024 budget diverges from the current year’s:
President López Obrador’s administration remained relatively committed to maintaining sane public finances despite initial concerns that he would pursue significant government spending increases and lead to the federal debt becoming unsustainable.
While debt did not grow unsustainably over the last five years, it did increase, with debt-to-GDP expected to be higher at the end of his term than any recent administration.
The larger planned deficit for 2024 raised concerns among some about the country's fiscal discipline and the stability of its debt. Those concerns are overblown, at least for the moment – we will discuss that in more detail in the next section.
Still, the concerns are understandable, particularly given Mexico's 1976, 1982, and 1995 economic crises. (Talk of debt sustainability, however, mainly pertains to the first two of these crises, as the 1995 crisis had less to do with debt than other factors.)
Long-term accumulations of public debt sparked the economic crises of 1976 and 1982. More importantly, that debt was funneled to an expansive government, which operated well over 1,000 state-run entities that generally failed to return on the government’s investment. Moreover, the 1982 crisis was worsened by a significant increase in external interest rates and a rapid drop in oil prices.
These crises ultimately shaped Mexico’s political economy — specifically, how economic forces shape political processes and outcomes. Mexico’s constitution and laws were amended to encourage sound fiscal management and careful planning, and economic decisions are generally carefully tuned to what domestic and foreign investors will tolerate. This has prompted three decades of relatively sound fiscal policy in Mexico. Even President López Obrador, who entered office with a sweeping mandate to pursue his policy agenda, was reined in by debt markets and their willingness to absorb more of Mexico’s debt.
(There’s a great, albeit very academic, book on this topic that is not focused on Mexico called “The Politics of Market Discipline in Latin America” by Daniela Campello [Amazon].)
The government argues that the 2024 budget is sustainable, and looking at it at face value, it is true. However, we likely disagree on most points of why that is.
The López Obrador government asserts that its budget is sustainable because the SHCP foresees strong growth in the coming years and because the budget aligns with Mexico’s long-term development goals. That would be an acceptable assessment. However, there are reasons to question the government’s plans and macroeconomic forecasts. For instance, the SHCP forecasts more robust economic growth next year than is expected by financial institutions and international organizations like the IMF. To the SHCP’s credit, however, it also forecasts much lower oil prices, which will benefit public coffers if they come in higher.
On the other hand, I view the debt sustainability question differently. The summation of my views is: It’s okay to run a larger deficit occasionally, but it’s very hard to maintain larger deficits over the long run. Moreover, the longer the debt burden remains high, the more likely a shock can rapidly cause debt to become unsustainable.
Nonetheless, Mexico’s public finances remain relatively strong, and investors need to be too concerned. Mexico’s debt-to-GDP ratio will still sit well below that of its peer countries. Across OECD countries, the average debt load was 89% of GDP in 2021, while Mexico’s was 54% (Note: Measures vary between the SHCP and OECD). Among other countries bearing a BBB- rating from Fitch — the more direct comparison for Mexico and its emerging market peers — the median debt-to-GDP ratio is 56%; this suggests that even with the larger deficit planned for 2024, Mexico remains far from breaching the debt-to-GDP ratios needed to see its debt ratings deteriorate significantly.
The SHCP said that this higher deficit is a one-off occurrence. However, that’s easy to do when a new government must take the reins of fiscal policy next year. Ultimately, making a more significant deficit a one-off occurrence is a relatively tricky promise to adhere to, and that is what’s particularly concerning. That’s where we get to the implications for Mexico’s next president.
Even if the 2024 federal budget is sustainable, one must question the future impacts, particularly given that a new administration will enter office in September 2023 and need to put together its spending package for 2025.
The next government will be pressured to cut spending and reduce the deficit. Increases in public debt like those expected for 2024 in the coming years will be unsustainable. Even another year of a similarly large deficit could spook investors and lead Mexico’s government to face higher borrowing costs. (Mexico’s debt-to-GDP ratio is projected to stand at 48.8% in 2024; 50% is a threshold that typically triggers investor concerns.)
The next government must reduce public spending without compromising essential social programs and infrastructure investments or increase public revenue via improved tax collection.
Budget cuts would require careful prioritization and the strategic allocation of government resources, a tough challenge in Mexico, given past cuts to public services and the various political and social interest groups that will fight spending cuts. Moreover, the government will face continued burdens from its state-owned oil company, Pemex, which it will continue to support despite its persistent financial challenges.
Increased tax collection requires the government to expand the tax base and improve tax collection efficiency. Both are significant challenges for Mexico, which governments have sought to address for two decades with limited success.
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