Discussion on Mexico’s new fiscal reforms may gain momentum after 2018

In the first quarter of 2016, fiscal consolidation took place in Mexico. Primary balance rebounded to 0% of GDP in March from -0.2% of GDP in Q1 2015. This was due to a cut of 8.3% y/y in real terms in primary spending. During the same period, operational expenses declined 10.9%. In the expenditure reductions, total public investment fell 17.4% y/y in the first quarter of 2016. Pensions continue to be the key source of fiscal pressures, noted Barclays in a research report. Pensions grew 4.3% y/y.

According to the Mexico’s Ministry of Finance, expenditure on this item is likely to grow 0.3 percentage points of GDP in the coming years. This indicates that pension costs will be 1.5% of GDP higher that the present level in five years’ time. The Mexican government has planned a reduction in spending of 2% of GDP for next year in order to attain a balanced budget. This, along with oil price recovery might permit the administration to attain its fiscal goals without hiking taxes, said Barclays.

Nonetheless, there might be restrictions on further spending cuts in the coming two years. Public investment is already falling to historical low levels with respect to GDP, while pension costs are rising. New fiscal reforms talk might begin to gain momentum in the start of the next administration.