Economic dynamics and fiscal consolidation

ste 2024 will close far from the goal planned by the government. Although the GDP growth of one percent in the third quarter was better than the previous two quarters, allowing an average annual growth of 1.7 percent to be achieved, the truth is that there will be a growth of only 1.5 percent at the end of the year, far from the 3 percent committed. This performance shows a clear slowdown of the Mexican economy, despite the fact that public spending in the election year complied with what was established in the 2024 economic package and that there was a good performance of private consumption and investment, along with an expanding external sector. supported by manufacturing exports and tourism.

We also had an increase in foreign direct investment that reached a historic balance of 31 billion dollars. However, the economy slowed down.

This is an atypical slowdown. According to Esquivel ( Reform11/10/24, p. 15), in part the explanation lies in the impact that two areas of the country have had on the national economy: the southeast, with zero growth, and the northern border states with negative growth rates. Formal employment data for these two areas confirm this situation. This slowdown, established since the second quarter, was worsened in the third due to the deterioration of the exchange rate, explained by the response of certain investors to the electoral result regarding qualified majorities in legislative spaces, as well as by the end of investments. public in infrastructure works in the southeast of the country.

Next year, the first full year of Claudia Sheinbaum Pardo’s government, will be a government transition and, therefore, there could be a certain delay in the implementation of important spending projects. It will also be complicated by the new government’s goal of reducing the fiscal deficit to 3.9 percent of GDP. If we add to this the slowdown that has occurred, and that will persist, we have a scenario in which it is possible that the already slow performance of the economy will be significantly affected. To achieve this goal of a deficit of 3.9 percent of GDP, important adjustments are proposed on the spending side, both in current spending and investment spending, which will have negative multiplier effects. Thus, this goal of fiscal consolidation could lead us to a scenario of very little growth or even recession.

That is why it is advisable to reconsider the deficit goal for 2025. Investor advisory companies, the so-called markets, together with international financial organizations, such as the IMF, have insisted that the consolidation process would have to establish a goal of 3.5 percent of the GDP, documenting the way in which it is proposed to achieve it. The government has accepted this insistence, although slightly softened by proposing a 3.9. Given the political circumstances and the negative perspective generated by Trump’s arrival to the United States government next February, the priority for the Mexican government should not be to reduce the deficit, but to strengthen public finances. Strong public finances will make it possible to comply with the committed social program, without a possible reduction in investment and current spending producing recessionary effects that affect what is at the center.

National public finances have been managed responsibly over the past six years and continuing to do so is important. There has also been very careful public debt, such that the balance of the public sector’s financial requirements of around 50 percent of GDP in 2024 is very manageable. What is relevant in the budget is the cost of this balance. Its weight in total public sector spending is very considerable and will reach 3.8 percent of GDP by 2025, which is almost equivalent to what is dedicated to economic development.

The proposed economic package can be improved by allowing the programmed deficit to be 4.5 percent of GDP. This correction, which would imply an amount for the fiscal deficit of 750 billion, would soften the negative effects, allowing resources to be allocated to priority purposes such as, for example, public higher education. The economic package, therefore, would be fiscally and socially responsible. Over the next five years we could gradually reduce the deficit with increases in tax revenue resulting from a possible tax reform that would begin to take effect in 2026-2027.