Public finances in the first quarter of the year – El Financiero

Public finances began the year (January to March) with an increase in federal income of 2.2 percent in annual terms. In the interior, oil revenues increased 31.7 percent annually, due to the strong increase in crude oil prices, while non-oil revenues fell 2.2 percent annually in real terms. Within non-oil income, taxes grew 1.9 percent hand in hand with the increase in ISR, which expanded 13.5 percent. In contrast, VAT and IEPS revenues decreased by 9.3 and 38.4 percent, respectively. The sharp drop in IEPS income is due to government subsidies for gasoline (the IEPS for diesel and gasoline fell 70.7 percent annually). In structural terms, oil revenues represented 16.9 percent of the total while tax revenues were 65.3 percent of the total.

On the public spending side, this increased by 0.8 percent in real terms per year. In the interior, programmable spending decreased 2.2 percent in real terms per year, hand in hand with the decrease in current spending (-2.5 percent per year). Likewise, capital spending contracted by 1.1 percent in real terms per year. The solid drop in direct physical investment of 28.1 percent stands out, a fundamental item to trigger the country’s economic growth. In contrast, non-programmable spending rose 10.9 percent annually in real terms, mainly due to the financial cost (5.5 percent) and participations (13.9 percent annually).

If we analyze public spending by its functionality, we observe that more than two thirds corresponds to social development spending, which presented an increase of 3.2 percent. Within, the health sector shows a real annual increase of 9 percent, contrasting with the strong decrease in spending on education of 17.2 percent. Expenditure on social protection related to welfare transfers increased 16.4 percent, reaching 431 billion pesos (higher than health and education as a whole: 340 billion pesos).

Thus, public finances start the year with mixed data. On the one hand, high oil prices are offsetting the drop in tax revenues. Although, a lower demand for oil due to problems in China and an anticipated global recession would put oil revenues in check. To this must be added that the country’s growth rates will be lower than anticipated by the Ministry of Finance, which will be overestimating tax revenues.

On the spending side, it is important to recognize the decrease in current spending but also in productive spending such as direct physical investment, essential to trigger the country’s growth and which continues to fall. On the other hand, the financial cost is beginning to accelerate due to the recent increases in interest rates. Finally, it is interesting how spending on social protection far exceeds that of education and health as a whole. While spending on science and technology continues to fall (2.8 percent per year). Without productive investments in education, science and technology, and infrastructure, it will be difficult to raise the country’s growth potential.

The author is General Director of GAMMA Financial Solutions and Professor of Economics and Finance at EGADE Business School. He has a PhD in Finance and an MSc in Financial Economics, both from the University of Essex in the UK. He was the chief economist for Mexico at Itau BBA, deputy director general of International Financial Organizations at SHCP, and researcher at Banco de México.