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IMF Pushes For Mexican Tax Reforms

by Mike Godfrey,, Washington

30 November 2012

In the conclusion to their 2012 Article IV Consultation with Mexico, the International Monetary Fund’s (IMF) Executive Board emphasized the necessity for additional tax measures to raise the revenue-to-gross domestic product (GDP) ratio from its relatively low level, and reduce the dependence on oil revenue.

The IMF’s Directors supported Mexico’s on-going fiscal consolidation and “encouraged the return to a balanced budget under Mexico’s fiscal rule in 2013, which will help put the debt ratio on a downward path and restore fiscal buffers,” but concluded tax and subsidy reforms will also be needed “to address pressures on the budget from population aging and declining oil revenues as a percentage of GDP.”

Continuing the fiscal consolidation that began after the fiscal stimulus during the recent financial crisis, Mexico’s structural primary fiscal deficit is expected by the IMF to fall by about 1% in 2012, and therefore return to balance. The consolidation efforts have helped stabilize public debt at around 43% of GDP.

However, at the general government level, Mexico’s total tax revenue in 2010 was not much more than half of the OECD average – 18% of GDP compared with 34% - and, if oil revenues are excluded, the difference with other similar countries is even more pronounced, due, in part, to its very narrow tax base.

A new administration will take office in December 2012, as Enrique Peña Nieto was elected President last July. As continued fiscal consolidation in 2013 would help turn the primary balance into a slight surplus and put the country’s debt ratio on a more sustained downward path towards pre-financial crisis levels, the IMF was encouraged that his reform priorities, as expressed during his campaign, included tax reform to increase public revenues.

The Mexican authorities concurred with the IMF that the fiscal policy environment will probably be more challenging from now on, given the likely end of large oil windfalls. The significant increase in oil prices during past years, together with limitations in the design of the stabilization funds that meant that little of the oil windfalls were saved, allowed primary spending to rise by 3% of GDP in the last four years.

In the future, while risks to the level of oil production seem to have declined, it is expected that continued over-reliance on oil revenues would represent a drag on public finances over the longer term. Oil revenues currently account for a third of government revenues, and, in the absence of a significant increase in production volume, are projected to fall by 2%–3% of GDP in the period to 2030.

In that respect, the IMF noted that it would be useful for revenue-enhancing reforms to include some frontloaded elements to help avoid a concentration on restraining public investment to achieve fiscal consolidation.

In reply, the Mexican authorities have concurred with the need to mobilize non-oil revenues, and took note of the IMF’s proposals to re-establish a positive excise tax on gasoline prices, to broaden the tax base for value-added tax, to overhaul the property tax, and to reform income tax, including the elimination of loopholes and special tax regimes. Amid low income taxes and social security contributions, the tax structure in Mexico still depends significantly on indirect taxation on goods and services.

On the expenditure side, the IMF suggested that significant savings could be achieved by consolidating pension eligibility requirements, revisiting the retirement age in the unreformed system, and reforming special pension regimes. In addition, it said, a rationalization of fuel and electricity subsidies could provide significant fiscal savings.

TAGS: individuals | tax | business | value added tax (VAT) | property tax | fiscal policy | retirement | budget | corporation tax | Mexico | social security | tax breaks | tax reform | individual income tax

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