Gasoline tax incentives also reduce fiscal maneuvering space

The Mexican Institute of Financial Managers (IMEF) has warned that fiscal stimulus this year for gasoline will reduce fiscal room for maneuvering and may reduce and redirect spending.

“The problem is that they can maintain this for some time, and we have to wait for the fuel prices to fall quickly, although the pressure will likely continue throughout the year and this in turn will put pressure on public finances,” said Mario Correa, head of the National Commission for Economic Studies at IMEF, in a statement. newspapers, that as long as the decision to support this is maintained, it will be necessary to resort to other types of cost-cutting in order to maintain it by videoconference.

For a few weeks, the government of Andrés Manuel Lopez Obrador decided to implement a fiscal stimulus complementing the special tax on production and services (IEPS) on gasoline, after the stimulus already in place had reached a rate of 100%.

With this stimulus – and its adoption of the ISR and value-added tax – it aims to contain the rise in gasoline prices after the escalation introduced by crude oil prices in recent weeks due to the Russian invasion of Ukraine.

I understand the intent is to prevent inflation from skyrocketing, but the problem is that it’s a subsidy that only goes to those who have a car or to those who are better off in society. Mario Correa added that it is difficult to justify from a social point of view, beyond trying to prevent it from affecting inflation.

He stressed that public finances have limited room for maneuver, after emergency funds – FEIP and FEIEF – were used before and during the pandemic to avoid a sharp decline in budget revenues.

In addition, he noted that the Union’s expenditure budget (PEF) has been prepared with macroeconomic variables that are no longer achievable, such as 4.1% growth and the sale of Mexican oil at $55.1 per barrel, so it is expected that in April, when the Delivering the initial parameters of Economic Policy 2023, the Ministry of Finance and Public Credit (SHCP) will adjust the framework.

Difficult inflation scenario

On the subject of inflation, the International Monetary Fund raised its estimates for this year from 4.4 to 5.0%, and indicated that this changed even before knowing the data for the month of February, when the rate reached 7.28%.

“Inflation dynamics, both in the United States and Mexico, are worrisome, because the pressures are more severe and persistent than expected. This expects a more decisive response from central banks in their monetary policy, which will inevitably mean a rise in monetary policy,” said Alejandro Hernandez Bringas, head of the International Monetary Fund. Interest rates and the potential for greater volatility in financial markets.

In this sense, finance officials have indicated that it could take up to three years for inflation to return to the set target of 3%.

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