a dilemma for public finances

In recent weeks we have seen the two-edged sword that represents the high dependence of public finances on the oil sector. With higher oil prices will come additional income for the Federal Government, while the pressure on fuel prices should be alleviated with less collection of taxes on gasoline and diesel.

The Mexican Institute for Competitiveness (IMCO) conducted a study to estimate whether the balance will be positive or negative. Considering scenarios with an average annual price of 70, 90 and 110 dollars per barrel of oil, esteem that the net losses, that is, they include both the additional income and the sacrifice of income due to the fiscal stimuli, could be 119.3, 154.9 or 205.5 billion pesos, respectively. These and other scenarios will depend on the price of oil and its instability, but also on government action.

The main reasons why this estimate ends up in the red are two. First of the production platform will be between 10 and 15% below what was anticipated in the general economic policy criteria established in the fiscal package for 2022; and second, that this year the rate of the shared utility right, which is the main component of the government’s oil revenues, will be 40%not 54% as in 2021.

The dilemma facing the administration is not easy to solve. On the one hand, you can assume a collection loss that limits you in your projects or forces you to go into debt; on the other, allow fuel prices to rise and assume the inflation that this implies.

Both sides of the dilemma involve social costs. The fiscal cost of keeping fuel prices as low and stable as possible is that the missing income represents money that cannot be used in works that benefit Mexicans, in addition to the fuel stimulus is regressive at all, that is it helps more the population with higher incomes, because they consume more fuel. As if that were not enough, the Mexican economy is going to grow less than expected by the Ministry of Finance when it planned its income and expenses for 2022, which implies that tax collection could be lower in general.

In the other side, inflation, which remains at levels not seen in two decades, represents a threat to the economy of Mexican households. Allowing fuel prices to rise implies allowing many other prices to rise as well, and this mainly affects those who have less. In February, annual headline inflation stood at 7.28%, while the price index for the minimum consumption basket increased 7.86%. In that month, low-octane gasoline (the one we know as Magna) had the fourth place with the highest incidence, among almost 300 generic goods and services that make up the basket with which inflation is measured.

The dilemma of the government and the panorama in which Mexico finds itself are not easy, but they are instructive: A long-term vision that produces profound changes is urgently needed to prevent energy policy from continuing to be fiscal policy. Until that happens, we will continue to be at the mercy of a price we cannot control.

* Jesus Carrillo (@JesusSCarrillo) is director of Sustainable Economy at IMCO.

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