Mexico’s President-elect Andrés Manuel López Obrador will have an initial budget of 700 billion pesos next year to undertake the social programs that were part of his campaign promises, according to projections by the Economic and Budget Research Center (CIEP).
This number would represent 3% of the country’s GDP expected in 2019 and one out of ten pesos of the federal budget, which will mount up to 5.7 trillion pesos .
This amount will be available for the upcoming administration to spend as they see fit, in addition to the budget devoted to education, health, security, debt, pensions, retirement funds, and other expenses that are established by law .
These unavoidable expenses will considerably limit the upcoming government’s capacity for resource allocation, representing an opportunity cost for social expenses such as the construction of new schools, hospitals, and roads.
Over the following year, López Obrador plans to lower Personal Income Taxes (ISR) to 20% and Value-added taxes (IVA) to 8% near the border with the United States , which will reduce the fiscal space in the area, representing a cost of 40,000 million pesos , according to Gerardo Esquivel , assistant-secretary elect at the Expenses department in the Ministry of Finance and Public Credit (SHCP) .
The 700 billion pesos available in the federal budget could be destined to the 25 programs that López Obrador plans to implement in 2019, which will require an investment of 500 billion coming out of the fiscal space, stated Esquivel a month ago.
The director of public expenses at CIEP, Sunny Villa , said that the contributions and participations coming from entities and municipalities, as well as pensions and public debt are the main expenses that the federal government is obliged to undertake, given that they represent all of the tax collection.
The CIEP estimates that 7 out of every 10 pesos of the federal budget is used for unavoidable expenses, two pesos can be modified in the middle term, and one peso on the short term. This last peso accounts for the fiscal space.
The specialists claimed that in order to modify unavoidable expenses, certain laws would have to be changed, particularly regarding the Tax Coordination Act . The upcoming government would also have to reform the pension system and debt contractions. “We cannot pretend to spend money if we do not revise our income first,” she stated.
Without a fully comprehensive tax reform that considers both income and outcome, the future government will hardly have enough resources for public policy implementation while guaranteeing the rights of citizens as is stipulated in the Constitution, stated the expert.
She explained that the fiscal space had diminished in the past few years since the current government had promised not to propose higher taxes to congress. Furthermore, Peña Nieto’s administration has done very little to make public spending more efficient.
Experts agree that the fiscal space left for the upcoming government is still subject to speculation. However, they considered that once the economic packet is approved, it should be the government’s priority to keep reducing debt.