Thursday, April 5, 2012

Fiscal Precariousness

Today in my class "Mexico, Central America and the Caribbean: Lessons in Political and Economical Development," we had a guest speaker, former Mexican Ambassador to the United States Jesus Federico Reyes Heroles. Ambassador Reyes Heroles is in town with the Mexican delegation accompanying President Calderon this week.

He stopped by SAIS to talk with our class about Mexico's fiscal situation and its oil company PEMEX. Ambassador Reyes Heroles' argument was one that you don't hear too much these days in the United States. He told us that in Mexico, taxes are too low and government spending is too low. He cited some statistics comparing Mexico to comparable OECD countries. In Mexico, government expenditures make up 25% of GDP; in the rest of the OECD, they are 44% of GDP. Mexican federal tax revenue comprises 17.5% of GDP, while in other OECD countries, it is much higher. In other contexts, these figures would be something to brag about, but despite the fact that technically, Mexico is fiscally sound (debt-wise), Reyes Heroles feels this situation has put Mexico in a fiscally precarious situation. Low tax rates have led to low government spending on infrastructure, which has stunted Mexican economic growth.

How does this all relate to PEMEX, the nationally-owned company that harvests the country's bountiful hydrocarbon resources? Reyes Heroles argues that, in a version of Dutch Disease, easy oil revenues from oil have made the Mexican state "lazy" and unwilling to raise taxes. While he notes that both major candidates in the 2012 Mexican presidential election have touched on the issue, the picture he painted did not leave much hope for unpopular fiscal reforms like raising local taxes or reducing tax rates on PEMEX.

Hopefully policymakers in the coming years will heed Ambassador Reyes Heroles' warnings because the oil spots that Mexico relies on will not flow forever.