The gasoline subsidy in Mexico puts public finances on the ropes | Economy

A worker dispenses gasoline in Mexico City.Daniel Augusto (DARKROOM)

For the twelfth consecutive week and in the midst of the energy crisis, the Ministry of Finance will maintain the fiscal stimulus at 100% to maintain the price of gasoline. Since last March, the Government of López Obrador decided to conjure up the word gasoline, a term that refers to the rise in fuel prices in Mexico. The Executive has preferred to waive the tax on gasoline rather than raise the price of fuel, however, as the geopolitical tension over the Russian invasion in Ukraine continues and with it the rise in fuel prices globally, this The decision is already taking its toll on public finances: from January to March 2022, the collection of the gasoline tax plummeted more than 70% compared to the same period of the previous year, equivalent to a reduction of some 43,462 million pesos, according to Treasury figures.

In its quarterly report, the federal agency indicates that from January to March the income collected by the Special Tax on Production and Services (IEPS) of fuels was 20,783 million pesos in the first quarter of the year, 70.7% less than in the same period of the previous year. “In order to avoid an inflationary rebound due to the international increase in fuel prices, the federal government granted fiscal incentives to the IEPS tax on fuels during the quarter, which generated a reduction in the collection of 43,462 million pesos with respect to what was planned in the period”, detailed the dependency.

In Mexico, a tax is paid on the fuel consumed, called the Federal Special Tax on Production and Services (IEPS), which is determined by the Treasury. The costs can also be modified by additional expenses such as transportation and storage. According to calculations by the Tax Administration Service (SAT), tax incentives for gasoline could cost the treasury between 350,000 and 400,000 million pesos this year.

Since this measure was announced last March, President López Obrador assured that the drop in collection would be corrected with the surpluses from oil revenues due to a higher price of crude oil. In the first three months of 2022, oil revenues amounted to 289,253 million pesos, which is 32% more than what was collected in the quarter of 2021. The global rise in crude oil, derived from the Russian offensive in Ukraine, has also benefited to the Mexican mixture. In April, the average price of Mexican oil for export was 99.9 dollars per barrel, 63% higher, compared to the same month in 2021.

However, analysts warn that this oil surplus cannot be taken full advantage of because it is being used in its entirety to cover the fiscal gap of the gasoline subsidy.

The coordinator of the Public Expenditure program of Mexico Evalúa, Mariana Campos, points out that the policy of fuel incentives benefits the country’s highest-income people more, so its application has a more political and electoral purpose than social development. “One hypothesis is that the government is seeking to regain the support of the middle class, which it largely lost, for example, in Mexico City. In addition, we have highlighted that this strategy is incomplete to combat inflation, since currently the increase in prices is generated by many other economic variables, such as the price of gas and electricity,” she assures.

The organization points out that if more IEPS income is collected, efforts could be focused on well-designed and temporary social interventions, through which the prices of some goods, such as food, are subsidized. In this way, it is possible to offset the higher cost of food for those who really need it, instead of forgiving the IEPS tax for high-income people.

Rodolfo de la Torre, a researcher at the Espinosa Yglesias Study Center, anticipates that the Executive will maintain the fuel subsidy, at least, until June 5, the day elections are held in six states of the country, however, he acknowledges that Every week that this measure is extended, the pressure on public finances increases. “If the government decides to sacrifice some social programs or some investments that are absorbing resources, it could still hold the subsidy until September of this year, but if they decide that these projects are a priority, they will have to stop subsidizing gasoline soon,” he says.

The specialist affirms that the increase in oil revenues, derived from the rise in oil prices, only cover 80% to 90% of the gasoline subsidy, for which the Government contributes 10% from other sections. ”There could be more cuts in health or education, for example, in the educational sector, 85,000 million pesos are being allocated to educational scholarships, the gasoline subsidy is 400,000 million pesos, that is, more than four times what is it spends for scholarships and most of this subsidy stays in the population with the highest income”, ditch.

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