Alberto González Pandiella
OECD
Alessandro Maravalle
OECD
OECD Economic Surveys: Mexico 2024
OECD Economic Surveys: Mexico
Abstract
Growth has held up well thanks to a resilient domestic demand that is supported by a strong labour market. Inflation is falling but monetary policy will need to remain tight until inflation returns durably to the target. The financial sector has ample buffers and good progress to buttress financial supervision should continue. Fiscal policy has strong credibility thanks to a robust track record in attaining prudent fiscal targets. Raising more revenues would enable to respond to productivity-enhancing spending needs and maintain the commitment with fiscal prudence. Reforms to the fiscal framework would enhance its ability to smooth out economic cycles and provide support during downturns.
GDP growth has held up well, with an enduring domestic demand despite inflationary pressures. Consumption is robust, supported by a strong labour market and increasing confidence (Figure 2.1). Remittances are high and consumer credit is gradually recovering, although it remains below its pre-covid level. Investment is trending up (Figure 2.2), supported by public infrastructure projects in the south. Thus, southern states, such as Oaxaca or Tabasco, have recently experienced particularly high economic growth (INEGI, 2023[1]). Private investment in machinery has also picked up, partly related to nearshoring. Exports and manufacturing have remained sturdy (Figure 2.3), supported by the resilience of the United States, which accounts for 84% of Mexican goods exports (Figure 2.4), a similar share as in Canada. Conversely, residential construction investment has remained weaker. Headline inflation has declined, reaching 4.9% (year-to-year) in January, while core inflation, that remained initially stickier, is now at 4.8%. Inflationary pressures remain particularly strong in services.
Note: Wage bill comprises both formal and informal workers.
Source: Bank of Mexico.
Total investment; Index January 2020 = 100, s.a.
Source: INEGI.
Source: Banxico.
Note: LAC is a weighted average of 33 Latin American and Caribbean countries.
Source: UN Comtrade.
The labour market is strong, with unemployment low (2.8% in December) and broader measures of unemployment confirming the strength (Figure 2.5). Labour market participation is increasing for women, although it remains significantly lower than in regional peers and other OECD countries (see Chapter 4). There is no information about job vacancies in Mexico but recent analysis suggests that the labour market is tight (Banxico, 2023[2]) and firms report difficulties finding workers with the appropriate skills and also to retain them. With the broader measure of unemployment close to 20%, there seems to be sufficient labour market resources available to respond to increases in labour market demand derived from the ongoing nearshoring of activities to Mexico, particularly if training and education policies adapt to the expected increase in specialised skills (see also Chapter 4).
Note: Panel A: the category “available to work” includes those not economically active (i.e. without job-search activities) but that would be available to work; the “underemployment” category refers to the share of economically active individuals aged 15 and over who have the ability and desire to work more hours than their current occupation permits.
Source: INEGI.
Minimum wages have significantly increased since 2019, from 42% of the median formal sector wage in 2018 to 59% in 2023. Further increases to the minimum wage should be gradual and aligned with labour productivity growth to limit their potential negative impact on formal employment, particularly among young and low-skilled workers. The latest evaluation, undertaken in 2018, concluded that past increases did not harm employment. However, given the significant recent increases, updating that evaluation is warranted, including assessing their impact on the likelihood of youth and low-skilled workers accessing formal employment. Granting the committee in charge of advising about the minimum wage (CONASAMI in Spanish) functional autonomy and independence and appointing to the committee labour market experts from academia with technical expertise would foster evidence-based analysis and recommendations, as seen in some OECD countries such as the United Kingdom.
On the external side, the current account deficit is largely financed by a stable pipeline of foreign direct investment (Figure 2.6). External debt has significantly fallen (Figure 2.7), as the share of public debt held by non-residents has fallen, reducing vulnerability to global financial conditions. The flexible exchange rate is helping the economy to absorb external shocks, with further backstops provided by ample international reserves and the IMF’s flexible credit line. Mexico’s risk measures have recently trended down (Figure 2.8).
Source: Banxico.
Note: LAC is a simple average of Chile, Colombia, Costa Rica, Argentina, Brazil, and Peru.
Source: IMF World Economic Outlook, October 2023.
Sovereign risk bond spreads, basis points
Note: The sovereign risk bond spread is the spread of 10-year USD-denominated bond yields vis-à-vis US Treasury bonds (JP Morgan Emerging Markets Bond Index spreads).
Source: LSEG.
The economy is projected to expand by 2.5% in 2024, after growing by 3.1% in 2023 (Table 2.1). Private consumption will be a key driver of growth, supported by low unemployment. Private investment will benefit from the relocation of manufacturing activity to Mexico. Public investment will also trend up in 2024 as ongoing infrastructure projects in the South get a final push towards their completion. Exports will suffer from slower growth in the main trading partners but will continue to benefit from deep integration in manufacturing value chains. Headline and core inflation will gradually slow and are expected to return to the 3% target in the first half of 2025, as the impact of higher interest rates takes effect and external pressures abate.
The outlook is subject to significant uncertainties and risks. The inflationary outlook remains particularly uncertain. Inflation may be more persistent than anticipated, requiring keeping rates high for longer. Episodes of global financial turmoil may trigger greater risk aversion and increase financing costs and foreign exchange market volatility. A sharper slowdown in the United States could also weaken exports and remittances. Additional events that could lead to major changes in the outlook include extreme weather events (Table 2.2), which could particularly impact the agriculture sector. On the upside, the ongoing reconfiguration of global value chains could boost investment more than anticipated.
1. Contributions to changes in real GDP, actual amount in the first column. 2. Consumer price index excluding volatile items: agricultural, energy and tariffs approved by various levels of government. 3. Based on national employment survey. 4. The fiscal balance shows the federal public balance. Public debt refers to the net stock of public sector borrowing requirements.
Source: OECD Interim Economic Outlook database.
The Central Bank has responded to inflationary pressures decisively and early in the cycle of interest rate hikes worldwide. Starting with 25 basis points hikes initially, and gradually increasing the size of the hikes as inflation became broad based, it has raised the policy rate by 725 basis points between June 2021 and March 2023 (Figure 2.9, panel A and Table 2.3). At 11.25%, the rate remained unchanged in the last board meetings, implying an increase in real rates (Figure 2.9, panel B). The government also launched a package of measures to mitigate food price inflation, including guaranteed prices for basic food prices or reducing import tariffs on basic foodstuffs. Headline inflation has significantly softened from a peak of 8.7% in August 2022 to 4.9% in January 2024 (Figure 2.10). Core inflation has also fallen, with services items proving more persistent (Figure 2.11). One year ahead inflation expectations remain above target but are falling while two-year ahead inflation expectations are well anchored. Inflation risks are high and include the rebound in oil prices, spill overs to food prices from international prices and severe drought conditions in some Mexican states. Monetary policy should remain restrictive to ensure that inflation decreases durably towards its target. This would require maintaining the rate unchanged at its current level, and starting to reduce it based on incoming data.
Source: Banxico; CEIC; Banco central de Colombia; Banco central de Costa Rica.
Note: In Panel A, the shaded area represents the Central Bank's inflation target range and inflation expectations refer to expectations by the private sector for the next 12 months. In Panel B, the sum of contribution’s growth rates does not add-up to the consumer price index growth rate.
Source: Banxico.
Note: Other services include restaurants and similar establishments, mobile phone services, car maintenance or medical consultations.
Source: INEGI.
The appreciation of the peso throughout 2023 (Figure 2.12) has also contributed to contain and reduce inflationary pressures. The appreciation, stronger than of peers’ currencies, can be explained by strong macroeconomic fundamentals, an attractive interest rate differential with the United States, as well as ample remittances, good nearshoring prospects leading to foreign direct investment inflows, and the recent rebound of tourism. On the real side, manufacturing activities, which in Mexico tend to rely more heavily on imported inputs and hence benefited from cost savings triggered by the peso appreciation, are better placed to navigate a strong peso environment, contrary to agriculture and services sectors, which tend to rely on domestic inputs.
Note: A decrease implies a depreciation of the Mexican peso and indicates an improvement in competitiveness. Real effective exchange rates (Panel B) are calculated against a basket of currencies (111 countries) using constant trade weights.
Source: OECD Economic Outlook: Statistics and Projections; Banco de México.
Communication is a fundamental pillar of monetary policy and Mexico’s Central Bank has made significant progress over the years in this area (OECD, 2022[3]). With inflation receding and expectations still well above the target, efforts to improve communication further and aid the formation of expectations are warranted. One possibility is to broaden the forward guidance given in the policy statements. Mexico’s Central Bank has been gradually providing more information about how the board expects the rate to evolve beyond the next board meeting. Continue evaluating the communication strategy, and enhancing it as needed, would help to further improve the formation of expectations.
Efforts to strengthen financial supervision after the Mexican crisis in 1994 and the global financial crisis in 2008 continue to pay off and the financial sector appeared robust during the pandemic and recent episodes of financial stress. Mexican banks exceed regulatory liquidity and capitalisation requirements (Figure 2.13) and non-performing loans are low and increased only modestly in the aftermath of the pandemic. Currently, 99.9% of bank accounts and 93.2% of deposits are fully guaranteed by the Mexican Deposit Insurance mechanism. Credit growth has continued to recover despite the tight financial conditions, particularly for non-financial companies and households, while mortgage lending remains subdued (Figure 2.14). The latter is partly related to a contraction in the lending portfolio of the Housing Fund Institute (see chapter 5).
The most prevalent risks for the financial sector are external, according to the Central Bank (Banxico, 2023[4]), most notably a recession in the United States, which could also trigger an economic deceleration in Mexico. Risks associated with tighter global financial conditions are mitigated by ample international reserves, active public debt management and low private sector debt (Figure 2.15). Mexican corporates hold relatively strong liquidity buffers, helping them to navigate the high interest rates environment. Households’ debt is mainly in the form of mortgages, largely concentrated in the upper part of the income distribution, whose payment ability is less eroded by high inflation.
Note: Bank capitalisation refers to the capital adequacy, regulatory tier 1 capital to risk-weighted assets. LAC is a simple average of Chile, Colombia, Costa Rica, Argentina, Brazil, and Peru.
Source: IMF Financial Soundness Indicators database.
Source: Bank of Mexico.
Note: LAC is a simple average of Chile, Colombia, Costa Rica, Argentina, Brazil, and Peru.
Source: IMF Financial Soundness Indicators; and IMF Global Debt Database.
Mexico has been gradually taking decisive steps to buttress the stability of the financial system. Key elements of Basel III standards, such as the total loss absorbing capacity requirements have been rolled out (IMF, 2022[5]). Legislating the supervision of financial institutions on a consolidated basis, so that affiliated financial entities are supervised as a single entity, considering their interconnectedness and potentials risk to the overall financial system, is a pending challenge to buttress banking supervision further. To enhance supervisors’ ability to monitor and early warn about financial risks, greater financial information about firms and individuals could be made available, for example by building a Central Balance Sheet Database, as in several OECD countries, such as Canada, Germany, Spain or the United States. Despite recent improvements in financial inclusion, continuing efforts to increase access to finance is warranted. Enhancing financial education, boosting competition in payment card markets and continuing to promote Fintech would boost financial inclusion, as detailed in the OECD’s 2022 Economic Survey.
Extreme weather events, such as hurricanes, droughts or heatwaves, are relatively frequent in Mexico and can generate financial stability risks. Efforts to assess those risks are ongoing and financial institutions are starting to integrate climate issues into their frameworks. Recent empirical work by the Central Bank revealed that the increasing exposure to hurricanes by Mexican municipalities imply that 14% more of the credit portfolio are exposed to hurricane risks (Banxico, 2023[4]). Phasing in a mandatory disclosure of climate-related risks by financial institutions and listed companies, as recommended in Mexico’s OECD 2022 Economic Survey, would facilitate a more transparent management of these risks.
Mexico has continued to advance with its innovative strategy to develop sustainable finance instruments. Since 2020, it has stepped up sovereign sustainable issuances, both at international and domestic markets, and national development banks and corporate bond issuance has also strengthened, making Mexico one of the largest markets in the region. Mexico has recently launched the first taxonomy in the world that covers both environmental and social objectives. It provides financial players and companies with transparent and consistent definitions of the activities that qualify as sustainable. The taxonomy (Box 2.1) has the potential to facilitate that a higher proportion of investors incorporate environmental, social, and governance considerations into their investment process and to provide stronger incentives for allocating resources to cleaner activities. Integrating gradually the taxonomy into regulations, ensuring that the resulting standards remain comparable with international ones, would be a valuable next step, and facilitate that Mexican public and private institutions are able to tap the increasing share of global financing opportunities linked to environmental, social and governance criteria. Mexico also launched in September 2023 a strategy to raise sustainable financing, establishing a road map and indicative targets for both the public and the private sector, which can be achieved based on already existing instruments.
In March 2023, Mexico launched its sustainable taxonomy that covers both environmental and social objectives (SHCP, 2023[6]). A sustainable taxonomy is a classification system that enables the identification and definition of activities, assets, or investment projects with positive environmental and social impacts, based on established goals and criteria. In its first phase the taxonomy focuses on three main objectives: climate change mitigation; climate change adaptation; and gender equality. The purpose of the taxonomy is to provide certainty and transparency to financial markets and promote public and private investment in activities conducive to those objectives. By enabling the tracking of financial flows directed towards sustainability, it offers greater clarity, certainty, and security to markets. By facilitating access to timely and reliable information, the taxonomy encourages the mobilization of capital and reduces the risk of greenwashing. While other existing taxonomies focus on climate and environmental objectives, Mexico’s taxonomy also includes social objectives, acknowledging the relevance of addressing social gaps and vulnerabilities in developing and emerging economies. The taxonomy is an instrument through which both public and private sector can define its investment strategies and design financial products or services conducive to sustainability. Likewise, it can be used by financial authorities to devise regulations aimed at disclosing information about asset types and serve as a framework for the issuance of sustainable debt instruments. Examples of this are the recent issuance of the first green resilience bond by the agriculture federal development bank (FIRA in Spanish), to support the agriculture sector adaption to climate change, and the launch of green mortgages by two private financial institutions, to facilitate access to sustainable housing solutions (see also Chapter 5).
Mexico’s fiscal policy has come a long way since the difficult times in the 1980s and 1990s (Box 2.2) and has gained strong credibility over the years thanks to a robust track record in attaining prudent fiscal targets and keeping public debt relatively low (Figure 2.16), despite having the lowest-tax-to-GDP ratio in the OECD. To support households’ purchasing power and reduce cost pressures during the 2022 rise in energy prices, as in several other OECD countries, the government put in place untargeted fuel subsidies, mainly reducing the fuel tax. The measure helped to reduce inflation in the short run but has come at a significant budgetary cost of 1.3% of GDP in 2022 and benefited disproportionally higher income households. The subsidy is being gradually phased out and is expected to be fully eliminated in 2024, based on government oil price projections. Higher oil revenues largely covered the cost of the untargeted subsidies in 2022 but, should oil prices raise again substantially, shifting towards more targeted support and providing better incentives for energy savings would increase fiscal space and favour higher energy efficiency.
In the 1980s and early 1990s, Mexico struggled with high fiscal deficits and high public debt resulting from two major economic crises, the 1982 debt crisis and the 1995 “tequila” crisis (OECD, 2009[7]). Both crises had a profound impact on the Mexican economy and generated a contagion effect throughout the rest of Latin America. In response to the crises, the government introduced strong fiscal consolidation and have since then followed prudent fiscal policies. In 2006, Mexico enacted its Fiscal Responsibility Law, which institutionalized the commitment with fiscal discipline by introducing rules and guidelines for responsible fiscal management, including limits on government spending, deficits, and public debt levels. Since then, Mexico has also consistently prioritized responsible debt management, diversifying its sources of finance, tapping international capital markets, reducing refinancing risks and improving reporting mechanisms to boost investors trust.
% of GDP, 2022
Note: LAC is a simple average of Chile, Colombia, Argentina, Brazil, and Peru. Panel B shows gross government debt.
Source: IMF’s fiscal monitor, October 2023 edition.
The public sector deficit is expected to reach 3.3% of GDP in 2023 (Figure 2.17), a slight increase from 3.2% of GDP in 2022, and the public debt-to-GDP ratio is expected to reach 46.5% at end-2023. The federal government targets a fiscal deficit of 4.9% in 2024, as budget allocations for social spending, particularly universal non-contributory pensions, and flagship infrastructure projects in the South significantly increased, and borrowing costs have risen. The net public debt-to-GDP ratio is expected to remain at 49% of GDP at end-2024 (Table 2.4). Thereafter, the public deficit is planned to fall to 2.1%, due to a reduction in public investment, partly linked with the end of some of the infrastructure projects in the south. The public debt ratio is expected to remain broadly stable around 50% of GDP the decades after (Figure 2.18). The expansionary fiscal stance in 2024 could help to continue addressing social gaps (see Chapter 4) and to improve medium-term growth prospects, particularly in southern states, but also increases the risk of high inflation. Making fiscal policy less expansionary by targeting the social spending increase and energy support measures exclusively at low-income households and basing the public investment projects on sound cost-benefit analysis would help to mitigate these risks. Looking forward, preserving the recovery in public investment initiated in 2020 (Figure 2.19) would support medium-term growth prospects. Infrastructure gaps remain large (see Chapter 3) and public investment as a % of GDP is lower than in other emerging economies and in the average OECD country.
Non-financial public sector, % of GDP
Note: Data for the year 2024 are estimates. In Panel B, the widest definition of public revenues is used, including also social security contributions and State-owned enterprises.
Source: Secretaría de Hacienda y Crédito Público; and OECD Economic Outlook database.
% of GDP
Note: * Are forecasts. Some rows may not add up due to rounding.
Source: Secretaría de Hacienda y Crédito Público.
% of GDP
Note: In the baseline scenario, real GDP growth and inflation follow OECD projections over 2024-25 and then gradually converge towards potential output growth and the inflation target rate of 3%, respectively; the exchange rate between the Mexican peso and US dollar is assumed constant over the simulation period. The government primary balance is assumed to follow table 2.4 and remain constant as of 2025. In the comprehensive reform scenario, a higher GDP growth is assumed over the period 2025-2050 under the hypothesis that structural reforms are implemented as to boost growth as reported in Table 2.5. The higher interest scenario assumes 200 basis points more than in the baseline. All scenarios and the baseline include ageing costs.
Source: OECD calculations.
Estimated impact of selected reforms on potential GDP per capita after 10 years
Note: Simulations based on the OECD long-term growth model (Guillemette and Château, 2023[1]). The scenarios assume that female employment rates (Scenario A), education outcomes (Scenario C) or public investment (Scenario D) reach the OECD average by 2040, and that the rule of law (Scenario B) converges to the first quartile of OECD countries by 2060, reaching the level of Chile. The individual reform effects do not sum up to the effect of the ambitious reform scenario due to non-linear effects in the model.
Source: Simulations using the OECD long-term model.
% of GDP
Note: Country group averages are unweighted. Emerging Markets average refers to the period 1990-2021 and includes ARG, BRA, CHL, CHN, COL, EGY, HUN, IND, IDN, MYS, MEX, PER, PHL, POL, ROU, RUS, ZAF, THA, TUN, TUR. LAC refers to the period 1993-2021 and includes ARG, BRA, CHL, COL, CRI, PER. OECD average refers to the period 1990-2020.
Source: Secretaría de Hacienda y Crédito Público; IMF World Economic Outlook; and OECD Economic Outlook database.
2.4.1. Keeping fiscal prudence while increasing spending to promote stronger and sustainable growth
Public spending restraint has been central in Mexico’s strategy to meet fiscal targets. As a result, public spending is low in international perspective (Figure 2.20). With spending on pensions trending up, keeping spending restraint implies a fall in spending in other key areas, such as education (Figure 2.21), despite significant needs (see Chapter 4). Looking forward, recent raises in non-contributory pensions imply that spending on pensions is expected to continue increasing and there will also be increasing health spending pressures, as the share of individuals without access to health services has recently increased (CONEVAL, 2023[8]). Mexico’s population is also starting to age. The fiscal costs of population ageing will have limited weight over the next decade but will increase gradually thereafter. Moreover, there are spending gaps in education, physical and digital infrastructure and the fights against climate change and corruption that will need to be addressed to strengthen growth and make it more inclusive and sustainable. The fight against crime could yield particularly large benefits, as a large share of firms perceived safety as an obstacle for their operations (see chapter 3).
Greater efforts to increase spending efficiency can contribute to create the fiscal space to finance higher spending. This could be achieved by making a more systematic use of spending reviews, cost-benefit analysis, means testing and public procurement processes. Infrastructure projects will benefit from more rigorous and transparent cost-benefit analysis, which would facilitate sounder project selection and closing infrastructure gaps in a cost-effective manner. More systematic evaluations of social policies could also help to boost efficiency. Mexico has an institute tasked with the evaluation of social programmes, CONEVAL, that runs sound ex-ante and ex-post evaluations, but its task is hampered by the quality of the registries of beneficiaries. Advancing towards the creation of a single registry of beneficiaries of social policies would be key to reduce the fragmentation of social programmes, avoid overlaps and improve targeting, as discussed and recommended in the 2022 Economy Survey (OECD, 2022[3]).
General government expenditure, % of GDP, 2022
Note: LAC is a simple average of Chile, Colombia, Costa Rica, Argentina, Brazil, and Peru. OECD is an unweighted average.
Source: IMF World Economic Outlook, October 2023.
Mobilizing more tax revenues will also be needed to address spending needs in key areas and at the same time maintain Mexico’s valuable commitment with fiscal prudence. Recent efforts to enhance tax collection, through administrative measures to reduce tax evasion and fraud as detailed in the 2022 OECD Economic Survey, show that tax reforms can pay off and the tax-to-GDP ratio increased to 16.7% in 2021, from 16.1 % in 2018. While these efforts are welcome, Mexico still has the lowest tax-to-GDP ratio in the OECD (Figure 2.22), 5.5 percentage points lower than Chile’s or 7.5 lower than Costa Rica’s (OECD et al., 2023[9]; OECD, 2022[10]). Greater efforts to facilitate tax compliance are warranted. For instance continuing ongoing efforts to expedite appointments with the tax authority and to further develop taxpayer portals and mobile apps, can enhance on-time filling rates, which, at 32% and 39% for the personal and corporate taxes (OECD, 2022[11]), are relatively low in Mexico. Supplementing these efforts to strengthen tax collection by increasing the revenue-enhancing capacity of some taxes would help to finance the increase in productivity-enhancing spending. A comparison with OECD and LAC peers tax structure indicates that Mexico derives the highest shares of its tax revenues from value added and corporate taxes (Figure 2.23) and that there is room to better utilised recurrent taxes on immovable property and environmentally related taxes (Figure 2.24).
Public expenditure, % of GDP
Source: Centro de Investigación Económica y Presupuestaria A.C. (CIEP) based on Secretaría de Hacienda y Crédito Público.
% of GDP
Note: LAC is a simple average of Chile, Colombia, Costa Rica, Argentina, Brazil, and Peru.
Source: OECD Global Revenue Statistics Database.
Recurrent taxes on immovable property have a significant redistributive power, are efficient and can deliver large revenue increases. In Mexico, recurrent taxes on immovable property (predial in Spanish) are under the responsibility of municipalities, which tend to have low technical capacity and lack incentives to raise the tax. Only 36% of municipalities manage and collect immovable property taxes. Immovable tax collection largely depends on the coherent and consistent land valuation and on the correct updating and management of municipal cadastres. Experience in some OECD countries suggests that establishing agreements between different government levels can support the update of the cadastre and the collection of recurrent immovable property taxes (Box 2.3). Some Mexican municipalities would benefit from establishing agreements with the state government to collect the tax and with the federal government to complete and update the cadastre, particularly those where the cadastre is incomplete or outdated. Establishing minimum tax rates at the federal level can prevent a race to the bottom among municipalities. Initial efforts to build a cadastral information platform to facilitate the exchange of geographically referenced data among the three levels of government, and the use of modern technologies, such as photogrammetric flights (Ethos, 2021[12]), have started.
% of total tax revenue, 2021
Note: LAC is a simple average of Chile, Colombia, Costa Rica, Argentina, Brazil, and Peru. The OECD average refers to the year 2020.
Source: OECD, Revenue Statistics in Latin America and the Caribbean 2023.
Note: LAC is an unweighted average of Chile, Colombia, Costa Rica, Argentina, Brazil, and Peru. OECD is an unweighted average of all member countries with available data.
Source: OECD Global Revenue Statistics database.
Colombia is the country in Latin America that raises the highest proportion of revenue from recurrent taxes on immovable property. In 2021, it generated revenues equivalent to about 0.8% of GDP, four times more than Mexico.
As in many countries, many municipalities had problems updating cadastral values. As a response, Colombia introduced in 2020 the Multipurpose Cadastre, which implied a reconfiguration of the cadastral functions that is being gradually adopted. Despite its novelty, municipalities where the new system is in place report increases in revenue ranging from 11% to 30% in 2022. For example, in Soacha, a municipality where the cadastre had not been updated in 12 years, revenues increased by 250% (Verástegui Niño, 2022[13]).
In the new system, the different government levels and individual operators collaborate in the collection, storage and update of the legal, physical and economic information about immovable properties (Verástegui Niño, 2022[13]). The system is composed of three actors: i) A geographical institute (Instituto Geográfico Agustín Codazzi), that operates at the national level and is the main cadastral authority, establishing all necessary regulations and being in charge of undertaking directly the cadastral management in those municipalities or regions that do not have a cadastral manager; ii) cadastral managers, which are public entities in charge of managing cadastral responsibilities; they can be individuals, regional or local entities or several entities with a collaborative agreement; and iii) cadastral operators, who are public or private entities with accredited technical capacity that are actually operating the cadastral processes under a contract agreement.
Taxes related to the purchase, ownership and usage of vehicles have become an important source of tax revenue for many OECD governments and are increasingly designed to influence consumer behaviour for environmental purposes. In Mexico, taxes on vehicle ownership or use (tenencia) were transferred from the federal government to the states in 2012. Currently, less than half of the 32 states collect vehicle taxes. Estimates from the Finance Ministry suggest that collection could increase by 0.2% of GDP (Table 2.6) with a compliance rate of 70%. The federal government could enhance incentives for states to collect and green this tax, for example by allocating higher federal transfers to those states doing so. It could also establish minimum tax rates at the federal level to avoid the race to the bottom among states occurring in some parts of Mexico. Restructuring the vehicle tax so that it considers environmental performance would also incentivise the use of more energy-efficient vehicles, as exemplified by several OECD countries, such as France and Israel. There is also room to green the tax system further by broadening the scope of the carbon price (see Chapter 3).
Note: Numbers in this table are estimates and some are subject to uncertainty. Implementation would take several years.
Source: OECD calculations.
There is also room to make the tax system more progressive, as its contribution to reduce income inequality is weak. This could be achieved by reducing the threshold for the top personal income tax bracket, which is very high in international perspective, as discussed in the 2022 Economic Survey of Mexico. The income threshold where single taxpayers face the top statutory tax rate is set at 25 times the average wage in Mexico, while it is 6 times in the average OECD country. Broadening tax bases, by eliminating exemptions benefiting most affluent taxpayers as recommended in the 2022 Economic Survey, would also increase revenues without increasing tax rates and increase progressivity. A significant part of the consumption basket is taxed at zero rate or is exempt, as outlined in the 2022 Economic Survey. Eliminating these exemptions and putting in place targeted social support to households in the lowest income deciles, could raise significant revenues, but entails significant political economy difficulties. In the short-term, exemptions particularly benefiting high-income households, such as those applied to cultural goods, education or certain financial services, such as insurance policies, could be phased out. Further broadening of the VAT base could be a medium-term option, once the tools available to target social programmes, to mitigate the effects of higher prices, have improved. Phasing out personal income tax expenditures, also large and regressive, would also improve revenues in a progressive way. Tax allowances and expenditures benefiting the most affluent taxpayers include deposits on special saving accounts and for the acquisition of shares of investment societies, health insurance premiums or educational expenses.
Tax revenues could also be significantly boosted by reducing informality. A comprehensive strategy would be needed for that, with actions in different policy areas, as further discussed in Chapters 3 and 4 of this survey. A simplified tax regimen targeted at self-employed and SMEs was introduced in 2021 (Régimen de confianza) to facilitate formalization. An evaluation of the scheme could help to enhance its design to facilitate SMEs tax compliance, which would be part of the comprehensive strategy to decrease informality.
To ensure the medium-term stability and credibility of its tax system, Mexico should also remain proactive in the on-going international efforts to harmonise tax standards and avoid base erosion and profit shifting. Mexico’s special tax regimes, granting tax reductions to firms located in some areas, such as in the border with the United States, are one of the elements in its strategy to attract foreign direct investment. Updating domestic tax rules in line with new international standards is the best way to remain attractive for foreign direct investment, maintain a sound reputation for international cooperation and transparency on tax issues and would also increase tax revenues. At the same time, progress towards establishing a minimum global corporate effective tax of 15% means that elements such as the availability of highly skilled workers or a green electricity matrix will become increasingly important to attract foreign direct investment (see Chapters 3 and 4).
2.4.2. Enhancing the fiscal framework
The current fiscal framework has helped to deliver fiscal prudence and ensure debt sustainability. However, under its current configuration the framework does not deliver countercyclical fiscal policies. Its ability to smooth out economic cycles and provide support during downturns is limited. Instead, the framework favours sharp reductions in spending to attain fiscal targets.
Three stabilization funds and three fiscal rules are the key building blocks of Mexico’s fiscal framework. There are two stabilization funds for the federal and another one for sub-national entities. Federal funds receive a share of the annual oil revenues. They aim at compensating for reductions in revenues with respect to those approved in the budget in a given year. The funds were depleted during the pandemic and authorities are considering alternatives to replenish them. They have been traditionally financed through oil revenues. Mexico is no longer an oil-based economy and oil revenues are shrinking and they are unlikely to be sufficient to finance the funds. Widening the sources of financing of the stabilization funds is therefore a priority. At the moment fiscal buffers in the main stabilization fund amount to 0.3% of GDP. A bill is under discussion in Congress, adding two additional sources of financing. This will reinforce the role of the funds as contingent fiscal buffers.
Mexico has three fiscal rules in place, two balanced budget rules and one structural current spending rule, as detailed in the 2022 Economic Survey Surveys (OECD, 2022[3]). The two budget balance rules favour that fiscal targets are met through discretionary spending cuts, and they lack a link with a medium-term fiscal anchor. The coverage of the existing spending rule, at 36% of public sector expenditure, is too narrow, hampering its ability to smooth spending over the cycle. Replacing the two budget balance rules with a debt-anchor and widening the share of public spending covered by the spending rule, as recommended in the 2022 OECD Economic Survey, would buttress Mexico’s fiscal framework and enhance its ability to forestall future crises, rebuild fiscal buffers, and respond to shocks. Canada and Sweden are among the OECD countries where debt-anchors successfully complement existing fiscal rules. Efforts to put in place these mechanisms are also progressing in other countries in the region, such as Chile.
These changes would entail major reforms to the Federal Budget and Fiscal Responsibility Law, requiring sustained efforts to build the necessary political consensus. In the meantime, Mexico would greatly benefit from putting in place a multi-year budget framework, as done by many OECD countries (Box 2.4). This would help to avoid the current exclusive focus on next year’s spending allocation and fiscal target. Mexico’s budgetary process could be supported and further enhanced by establishing an independent an adequately resourced fiscal council, as recommended in previous OECD Economic Surveys (OECD, 2022[3]), (OECD, 2019[14]) and following the OECD principles for independent fiscal institutions.
Today, most OECD countries have a multiyear budget framework in place (OECD, 2019[15]). They typically employ a 3–4-year time horizon, including the budgeted fiscal year. In countries, such as Canada, France, Germany, New Zealand, Portugal, Sweden or Switzerland, governments present their multi-year budget bill to their respective Parliaments, detailing the proposed budget for the upcoming fiscal year and the subsequent years. Multi-year budgeting frameworks put together short-term and medium-term fiscal policies, helping governments to align budgetary decisions with long-term policy goals, such as investments in education, healthcare, infrastructure or environment protection. Multi-year budgeting also facilitates better planning, accountability and evaluation. By setting targets and objectives over a multi-year period, ministries gain assurance about available resources and can track progress and assess the effectiveness of its policies and spending decisions.
The credibility of Mexico’s fiscal framework could also be further enhanced by making the support to PEMEX more transparent and predictable. Despite the favourable oil price environment and the continuous support from the federal government, the situation of PEMEX continues to be challenging. Support from the federal government has taken the form of lower tax burden, extraordinary liquidity injections, capital investment and explicit support when raising financing. Its liabilities amount to 15% of GDP, making PEMEX a large contingent liability for the government. The materialization of sizeable contingent liabilities can be a major source of fiscal distress, as exemplified by several euro area countries in the 2010s (ECB, 2021[16]).The 2024 budget sets aside explicitly for the first time the financial support that PEMEX will receive in 2024, amounting to USD 8.5 billion (0.5% of GDP), helping PEMEX to meet the USD 10.9 billion (0.7% of GDP) in payments due in 2024. Estimates suggest that PEMEX will need USD 20 billion per year (1.1% of 2023 GDP) of additional support between 2024 through 2027 (FitchRating, 2023[17]). Mexico should condition any support to PEMEX to implement a transparent and credible strategy to improve its environmental, social and governance (ESG) track record, including an explicit strategy to adapt to ongoing changes in the energy market and to reduce its carbon footprint. Aligning the governance of PEMEX and other State-owned enterprises with the OECD Guidelines on Corporate Governance of State-owned Enterprises (OECD, 2015[18]), as recommended in the 2022 OECD Economic Survey, would also strengthen incentives to improve performance, accountability and transparency.
References
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[2] Banxico (2023), “Informe trimestral, enero-marzo 2023”.
[8] CONEVAL (2023), “Medición de Pobreza 2022”.
[16] ECB (2021), “Contingent liabilities: past materialisations and present risks”, Financial Stability Review, May 2021. European Central Bank.
[12] Ethos (2021), El impuesto predial: la oportunidad que todos dejan pasar, Ethos Laboratorio de Políticas Públicas.
[17] FitchRating (2023), “Mexico’s Budgeted Pemex Support is Directionally Positive”, Non-Rating Action Commentary.
[5] IMF (2022), “Mexico: 2022 Article IV. IMF Country Report No. 22/334; November, 2022”, 2022.
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