Restrictive fiscal policy: what is it and when is it applied?

Within the management of public finances can be found the term restrictive fiscal policywhich, contrary to the expansive fiscal policy, is applied when seeking to generate a surplus in the budget through an increase in taxes, maintaining public spending.

Usually, governments apply the restrictive fiscal policy at times when there is a rise in prices caused by an excess of aggregate demandthat is, the total of goods and services that are demanded by a country.

With the application of a restrictive fiscal policyThe governments that implement it seek to reduce aggregate spending, through tax increases, which affects the pockets of consumers, who probably choose to consume fewer products that are not the basic basket, since they have to allocate a greater amount of their income to pay taxes.

Meanwhile, reducing public spending – or keeping it at the same level – can discourage private investment. With this, the budget deficit will decrease and, even, a surplus can be reached.

In the case of reducing spending, this affects public works and, therefore, the generation of formal jobs, so this type of fiscal policy is usually unpopular among governments due to negative sentiment among citizens before the application of these policies.

After the Covid-19 pandemicthat affected the world, it is expected that some countries may opt for this type of policy, especially in the area of ​​taxes given that with the health situation, in order to support the population, a greater expense had to be disbursed or else, to higher debt. In Europe, for example, Spain and Slovakia are expected to be the countries that implement a restrictive fiscal policy to reduce their deficit levels through spending containment.

What fiscal policy is applied in Mexico?

During the pandemic COVID-19Mexico implemented little fiscal support despite the criticism this caused. With this, the country tried to contain the increases in debt, which were due more to the depreciation of the peso and the contraction of the economy than to greater indebtedness.

According to information from the International Monetary Fund (IMF), Mexico stood out for the second consecutive year for having a balanced deficit in 2021, around 0.6% of the Gross Domestic Product (GDP).

The IMF Fiscal Monitor pointed out that Mexico could reach balance in its public finances around 2022 and 2023, going from a deficit of 0.1% of GDP in 2022 to a possible surplus of 0.2% the following year; however, these estimates for October last year were made without considering the impact of the Omicron as well as the political tensions between Russia and Ukraine that have arisen this year.

A month later, the IMF indicated that the disarticulation of reforms – such as the electricity reform – are having an impact on investment, generating uncertainty and a perception of “an eroded independence” in the institutions and their regulation.

In the same analysis, the fund indicated that the mix of macroeconomic policies is perceived as “relatively restrictive”.