Mexico: Government continues pushing economic reform plans
September 13, 2013
Mexican policymakers continue to move the country's reform agenda forward. The reform agenda is one of the major topics of focus in the region. After presenting a groundbreaking energy sector reform plan in August, President Enrique Pena Nieto unveiled the long-awaited fiscal reform package in conjunction with the 2014 budget on 8 September. The market had expected a more ambitious tax reform and thus received the proposed overhaul with some disappointment. Sluggish growth in the economy prompted the government to give up on plans to expand the value-added tax (VAT) base to include food and medicine. Additional taxes would hurt private consumption and thus exacerbate the country's current economic slowdown.
The fiscal reform agenda contains two main elements: First, a series of tax increases as well as new taxes in areas which were previously exempt from levies. The most notable increase is in the income tax rate (ISR) for high-income brackets, which will rise from 30.0% to 32.0%. New taxes include a 10.0% tax on capital gains from the stock market, a new levy on sugary soft drinks (to combat obesity), and a new carbon tax. Furthermore, exemptions on private education services and on mortgage loans will be eliminated. The second element is the simplification of the tax structure for businesses by eliminating both the IETU, or corporate alternative minimum tax, and the IDE, a tax on cash deposits.
The fiscal reform is aimed at increasing the tax take by 1.4% of GDP in 2014. The government hopes to raise revenues by nearly 3.0% of GDP by 2018. Furthermore, in the wake of the weak economy, the government's 2014 budget includes a proposed increase in the fiscal deficit as part of a countercyclical stimulus strategy. Excluding investments in Pemex - which accounts for around 2.0% of GDP - the government proposes a fiscal deficit of 0.4% of GDP in 2013, which will increase to 1.5% of GDP in 2014. Including these investments, the fiscal deficit would be 2.4% of GDP in 2013 and 3.5% of GDP in 2014, which would be the country's largest deficit in more than a decade.
Analysts polled by LatinFocus Consensus Forecast are still factoring the latest developments and expect the fiscal deficit to reach 2.2% of GDP this year. For 2014, panelists see the fiscal deficit at 2.3% of GDP.
Author: Ricardo Aceves, Senior Economist