Fiscal Adjustment Overview
All fiscal adjustments incur social costs, ideally temporary. However, the current adjustment brings lasting costs in terms of human capital, infrastructure, and public security.
Revenue Growth and Tax Collection
Public finance information for January-May 2025 highlights a 3.7% real growth in revenue compared to the previous year and strong collections from income tax (+8.2%) and VAT (+12.5%). This is unusual given the stagnant economy.
The Secretariat attributes this to special efforts, which will be challenging to sustain for long.
Déficit Reduction Progress
The fiscal adjustment is on track to meet the annual target of reducing public deficit from 5.9% of GDP in 2024 to 3.9%. This is undoubtedly positive news.
In January-May, the deficit was nearly half of the previous year’s due to a significant contraction in programmable spending (-9.6%) and public investment (-29.6%). This is noteworthy as it’s the most pronounced since 1995.
Accelerated Spending on Signature Projects
Since 2023, and more so in 2024, spending on the government’s signature projects accelerated extraordinarily to complete them. Now, public investment is returning to a modest level.
- The previous government’s extraordinary investment was in projects with little or no net profitability, such as the Dos Bocas refinery and the Maya train, Mexicana de Aviación, and Felipe Ángeles airport.
- Basic infrastructure maintenance has been neglected, including transportation, urban, hydrological, energy (electricity and hydrocarbons), schools, and hospitals.
- The fiscal adjustment focuses on key activities to generate human development opportunities, such as security, education, and public health. In return, direct unconditional transfers are protected.
Allocation of Public Spending
Out of the 24 budget functions, Social Protection (social programs) and Fuels and Energy occupied 54% of programmable spending. Including Health, Education, and Public Security reaches 82%. In January-May 2025, only Social Protection spending grew annually (+4.5%).
- Excluding scholarships, which are essentially direct transfers, the annual reduction in other program spending is -20%.
Concentration on Energy Sector
Despite spending less, the government insists on dominating the energy sector. The Fuels and Energy function accounts for 20% of spending, while many of these functions could be carried out more efficiently by the private sector.
Key Questions and Answers
- What is the current fiscal adjustment’s impact? It brings lasting costs in terms of human capital, infrastructure, and public security.
- How have revenues and tax collections performed? Revenues grew by 3.7% in real terms, with strong collections from income tax and VAT.
- What is the progress on reducing public deficit? The fiscal adjustment is on track to meet the annual target of reducing public deficit from 5.9% of GDP in 2024 to 3.9%.
- How has public spending been allocated? A significant portion of public spending is allocated to Social Protection, Fuels and Energy, Health, Education, and Public Security, with a -20% annual reduction in other program spending.
- Why is the government concentrating on the energy sector? Despite spending less overall, the government insists on dominating the energy sector, which accounts for 20% of spending.
