The Challenge of Growth

Luis Rubio

As anyone who has sat through a Shakespearean play will attest, the second act can be long and painful, and the hero often faces setbacks. Something like that appears to be happening to the Mexican economy.

The vision emerging from the Finance Ministry is that the country is poised at the threshold of an era of unprecedented growth because it is reorganizing structure of tax collection and is focusing the budget on the promotion of growth. That is, Mexico´s economy is going to grow considerably and tax collection will increase abundantly, arriving at a virtuous circle that will be strengthened with new legal reforms oriented toward achieving the accelerated growth of productivity. Sustained on assumptions and estimates that are nothing if not optimistic, the government is incurring in a growing fiscal deficit (that actually began to grow in the previous sexenio), ignoring both the experience of the decades of crises that the country underwent as well as the international panorama that is deteriorating day to day: oil prices in a downturn, interest rate increases and a slump in the growth of the world economy. In the face of this panorama, prudence might be advisable, above all because once spending takes off it is very difficult to break the ascending spiral: once the base is set, negotiations with state governments start at an always higher levels and projects are always more costly than their budgets. The question is why the government is willing to expose itself to such great risks, given a long history of crises.

One answer is, simply and straightforwardly, that there has been a generational change in the government and a good deal of the human capital –experienced technicians- that there was in the Finance Ministry has been replaced by young people with ambitious political aspirations but, above all, novices who did not live through the crises of the seventies, eighties and nineties. Their willingness to take risks is very superior to that which existed in past decades.

A second answer, not contradictory to the latter, is much more interesting because it illustrates the contrasts characterizing the country. The exceptional analyst and observer Oliver Azuara conducted an exercise that permits understanding much of the economic situation that the country is experiencing, as well as the risks that it is incurring. Were it not for this being the reality through which a population anxious to get ahead is living, the scenario would be akin to a drama penned by Shakespeare.

Azuara analyzed the tendencies of State of Mexico public finances during the last 20 years: “Something interesting that the data suggest is what took place when today’s President Peña was governor of that state. In that period there was a tremendous increase in state revenues without a substantive increase in the debt. That is, they imposed a certain order in public finances and collected taxes, which provided them with a financial margin for infrastructure projects and thus constructing Peña’s presidential candidacy”. The expenditure –above all in public works- was the emblem of the state government at that time but, as Azuara observes, did not imply raising the state debt, which created a virtuous circle. It would appear logical that the same team would extrapolate to adopt that strategy in the federal government.

However, “at the federal level things are not coming out right for them with that formula. The tax-levying capacity –without including the value-added tax, IVA‑ was at its limit and the fiscal reform, although it did increase tax collection, depressed decisions to invest by the private sector”. That is, the federal finance ministry is nothing like that of the states: years of successive fiscal reforms and the elimination of tax loopholes at the federal level has left a much smaller margin for raising the collection of taxes than would be possible at the state level.  The result is within sight: the expenditure grows but growth does not, which implies that a mushrooming debt is accumulating but without benefit in matters of economic well-being. “They assigned the resources before having the tax monies in the coffers… something they didn’t do in the State of Mexico. The amount of resources needed to cover the new expenses will be growing and that is of great concern”.

The two explanations seem plausible: there’s lesser understanding of the risk to which the government is laying itself open and a prior experience for the policy makers that is not translatable into the present reality. The result is an economy that continues to be paralyzed, but now in an increasingly more complex and negative environment both because of the economic situation in the rest of the world as well due to the internal imbalances in which it might be falling.