Economy 4.0 | Economic weakness: public finances know it – El Sol de México

The INEGI has confirmed the weakness of the Mexican economy: during the first quarter of the year the GDP increased only 1.6%, despite the fact that its comparison was a drop of (-) 3.8% during the same period of 2021.

Although the industrial sector posted a better performance by increasing 2.9%, the fragility associated with the situation in the domestic market was observed in the services sector.

The variation of 0.6% shows that the internal market recovers slowly, a fact associated with the structural precariousness of the labor market, the increase in inflation and interest rates. In the same way, it points out the negative structural change that is being experienced in some components of the sector.

The lower investment in the construction of schools, offices, hospitals, shopping centers, restaurants, industrial buildings, for example, and the contraction of professional services is not compensated by the increase in manufacturing activity and public investment in some projects of infrastructure.

One consequence of this is the weak performance of private consumption, particularly that which is carried out in goods of national origin, some of which have been displaced by imports.

Informality and job creation that pay less than 3 minimum wages inhibits the strengthening of the internal market and is a consequence of the fact that the Mexican GDP is lower than it was before the pandemic.

The challenge for Mexico is not temporary: according to the IMF, the national economy will continue to lose places at the international level, by the end of 2023 it will rank 17th in the world.

Very far has been the eighth place that the country reached globally during the 70’s of the last century and the 10th position that it had at the beginning of the following decade.

In 2023, nations previously reviled by war and poverty, such as Iran and Malaysia, will displace the second largest economy in Latin America.

Which is the reason? The low inertial growth and that associated with the increase in interest rates that will cause an additional brake on productive investment, consumption, employment and economic growth.

The latter will exacerbate the lack of fiscal sustainability of public finances, something that is already evident in 2022 due to lower tax collection.

In the first quarter of 2022, VAT collection decreased (-) 9.3%: an invoice of the informality and weakness of the internal market. In addition, the price control applied to fuels implied a decrease of (-) 38.4% in the collection of special taxes.

This reality coexists with the financial commitments that the losses recorded by CFE (100 billion pesos in 2021) and Pemex’s debt imply.

Although extraordinary oil revenues compensated for lower tax collection, the solution cannot be attributed to the limitations faced by public finances.

The last 3 decades of the 20th century showed the inconvenience of depending on volatile income (oil) at times of low economic growth and when the rise in interest rates will imply greater pressure on the Historical Balance of the Financial Requirements of the Public Sector (13.1 billion pesos).

The imbalance would have to be resolved with greater economic growth and formalization of the economy. Otherwise, adjustments to the public budget will have to be made.

In the last 40 years, the Mexican model failed in the areas of growth and formalization: everything was left in the hands of a restrictive fiscal policy and selective austerity, a strategy that led to a dead end that Mexico must get out of if it really wants to create a Welfare state.