Growth without tax reform and rescue of Pemex: the inertia of López Obrador's policies in Sheinbaum's economic project

Promoting progressive tax reform has become the elephant in the room for the left in Mexico.

The fear of disturbing the middle and upper class and causing their electoral rejection marked the six-year term of Andrés Manuel López Obrador and has crept into the economic program proposed by Claudia Sheinbaum, the ruling party's presidential candidate.

In her government project, the Morena standard-bearer has set a goal of economic growth of 3% annually through measures that avoid the necessary reform so that those who have the most pay more taxes.

Fight tax evasion;

resorting to debt to invest in infrastructure;

reduce the structure of the State;

encourage

nearshoring

;

supervise large taxpayers;

Saving on administrative expenses and simplifying bureaucratic procedures are the proposals of her economic plan.

The tax reform stands out for its absence.

Additionally, the candidate has taken up another of López Obrador's priorities: the financial strengthening of Petróleos Mexicanos (Pemex) through the injection of immense public resources.

Specialists affirm that Sheinbaum and Morena place Mexico in the rearguard of countries that combat inequality through the tax system, which puts at risk the viability of bringing the Government's projects to fruition.

“The second floor of the Fourth Transformation cannot be built on the weak financial foundations of the first floor,” maintains Carlos Brown, director of Knowledge and Tax Justice at Oxfam Mexico.

“It is being built on a policy that, although it may have represented substantial savings and a certain margin of maneuver for the outgoing Administration, is not sufficient for the spending needs and for any agenda priorities that Sheinbaum may have, if he comes to power ", Add.

Mariana Campos, director of México Evalúa and public finance specialist, maintains that expanding resource collection through a tax reform is not useful if the priorities of government spending are not modified.

In particular, she points out, it is “worrying” that Sheinbaum has included in his economic program, as one of his priorities, energy sovereignty and the rescue of Pemex with public resources.

“It is important to consider that the company became poorer during the six-year term, despite the fact that the Government has reduced its debt.

This is because it has had a greater asset loss in recent years.

Although its level of liabilities decreased, the value of its assets depreciated to a greater extent.

There has not been adequate investment in the company to generate income,” says the specialist.

“The energy sovereignty model causes losses.

The Government is supporting a loss-making company with public money,” she adds.

The absent reform

Sheinbaum has openly expressed his rejection of the progressive tax reform measure.

She declared it in the book

Claudia Sheinbaum: Presidenta

(Grijalbo, 2023), and this week she reaffirmed it in an interview with

La Jornada

.

In both cases, the standard-bearer maintained that there is “margin” to raise resources with the current tax regime, which generates the largest collection through consumption and income taxes.

“One of [López Obrador's] most notable policies has been to increase public income without resorting to the creation of new taxes or the increase of existing ones,” she says in her government program, titled

100 steps for transformation

.

“This has been achieved mainly through republican austerity, the fight against corruption and improvements in the efficiency of tax collection,” she adds.

The candidate entrusted her project to economist Gerardo Esquivel, who was deputy governor of the Bank of Mexico in the López Obrador government.

The plan recognizes that there will be greater public spending needs in the next six-year term.

“It will be necessary to increase the amount of social spending and public investment to counteract inflation and the increase in the elderly population,” the document states.

Although one of the candidate's bets is to generate savings of 4,000 million pesos annually through spending austerity policies, her government program admits that these resources will be committed in advance.

“Economies and savings are tagged to the Pension Fund for Wellbeing, so these resources cannot be freely disposed of,” the text says.

Gerardo Esquivel, in November 2022.WILL OLIVER (EFE)

Another proposal is to resort to moderate debt to finance infrastructure projects, especially in marginalized areas (Sheinbaum offers that a “manageable” level of debt will be maintained and with a low financial cost).

It is also proposed to reinforce the collection of taxes from large taxpayers, but also to expand the tax base and encourage compliance with obligations by small taxpayers.

It is proposed to take advantage of

nearshoring

and direct investments with a regional and sustainable approach.

It is planned to consolidate infrastructure works: expand the capacity of the ports;

create nine industrial corridors and promote rail transport of cargo and passengers.

The economic project indicates that Pemex and the CFE will be supported so that they continue to be “levers of development,” and the number of older adults receiving pensions will increase by 3 million.

All of these economic proposals are insufficient to address the country's great public needs, Brown maintains.

“Tax reform is unavoidable.

There is no way the federal government will have the leeway to implement any public spending measure.

"The social programs that are already constitutional, the demographic challenge posed by pensions, debt service, the water crisis, the climate crisis that will force us to think about infrastructure issues, the care system," says the specialist.

“It is an agenda that is growing by leaps and bounds, which is going to have significant financing needs, and how it would be paid for has not been discussed.

“We are in a very extraordinary situation in which the tax discussion is urgent,” he says.

Brown points out that the progressive tax reform implies that more taxes be charged “to those who have the most and those who earn the most,” especially if one takes into account that in Mexico extreme poverty coexists with the extreme concentration of wealth (8 out of every 100 pesos of private wealth belong to 14 ultra-rich Mexicans, while more than nine million people do not know if they will be able to eat the next day, according to the study

The Monopoly of Inequality

prepared by Oxfam).

The specialist explains that a tax must be created on large fortunes and the tax on large inheritances, donations and inheritances must be restored.

And he adds: the personal income tax model must be reformed, so that the nominal rate paid by a millionaire is not identical to what a salaried worker has to pay;

capital—the purchase of shares—should be taxed more than income from work;

VAT (consumption tax) on food and medicine, which negatively affects the poor, must be eliminated, and tax benefits must be reconsidered, which help especially those in the top 10% of income;

The property tax on real estate should be better collected and the collection of vehicle ownership should be reconsidered.

“There is a mistake in how the reform is sold.

If you sell it as a burden to people and don't explain that no one wins with the current arrangement, other than a few, it is very difficult to build,” says Brown.

"If you tell small business owners that you are going to collect taxes without saying to whom and how, then obviously they are going to jump and say 'I already have taxes.'

“It is very important how the reform is communicated, making it very clear why the current arrangement does not benefit the vast majority of the population and ends up harming everyone,” he adds.

The black hole of Pemex

López Obrador often talks about the “rescue” of Pemex and the Federal Electricity Commission (CFE), the two main public companies in Mexico, and has based his desires to give the country energy sovereignty on both parastatals.

It's not just a speech.

His government has just forgiven $5.8 billion in taxes from the last four months due to its large liabilities with suppliers and a short-term debt maturity.

Also, for the first time, a transfer was included in the Expenditure Budget to pay the amortization of Pemex's debt in 2024. Despite the constant support, the oil company remains the most indebted in the world, with 105,836 million dollars.

Sheinbaum has proposed following the same line of state support for the public company.

“We will consolidate the strength of Pemex and CFE so that they can once again be a lever for development.

This will be achieved by improving its finances, organizational, profitable and environmentally friendly investment projects, which guarantee energy sovereignty [...] and we will guarantee the market operating conditions necessary for its efficient functioning," says the project. the candidate.

Claudia Sheinbaum and Manuel Bartlett Díaz, general director of the Federal Electricity Commission (CFE), in Mexico City, in August 2022. Luis Antonio Rojas (Bloomberg)

Mariana Campos calls for implementing a business model for Pemex that does not generate losses that the Government will then have to correct.

“I'm worried about more money being taken out of the economy and invested at a loss,” she says.

The director of México Evalúa maintains that a fiscal reform must contemplate the dependence of the federal government and the states on oil revenues.

“The Government requires greater investments, both economic and social.

It must invest more in public infrastructure and in better public services that can help close inequality gaps.

However, that will not be possible if Pemex's situation is not modified, because what we are seeing is that the Government's priority is to finance the company and the losses it is having,” says Campos.

The specialist affirms that, although a tax reform to obtain more income is necessary, it will be insufficient if the Government's spending priorities do not change.

“It is very important, in a tax reform, not only to see the taxation part, but also the spending part, because the effect of a fiscal policy—hence a tax reform—cannot be seen only from what is left. to be raised, but also how it is going to be spent,” says Campos.

“The full effect on inequality is from all of these policies, not just income,” she adds.

“If you collect progressively, but do not spend progressively, there will be no effect on inequality.

Not seeing the spending instruments is very risky.”

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