Journal Issue
Share
Article

Mexico: Selected Issues

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
November 2019
Share
  • ShareShare
Show Summary Details

Budgetary Spending Pressures1

This note discusses trends in Mexico’s public spending and its composition, assesses the quality of past and planned fiscal adjustments, and studies options for efficiency improvements in social spending, including in health and education expenditure. The analysis shows that Mexico’s limited and rigid programmable spending envelope has been cut from 19.6 to 17.3 percent of GDP since the global financial crisis. Moreover, the composition of spending has shifted away from capital spending and, based on functions of government, out of health, education, housing and community services. The planned fiscal adjustment under the authorities’ medium-term fiscal framework would reinforce both trends by shrinking programmable spending within the same spending items. This raises questions about the quality and sustainability of the adjustment and, even more so, about scope for further cuts in these areas. The note further underscores that sizable and durable expenditure savings can best be achieved by reforms and efficiency improvements and highlights such options for social spending.

A. Introduction

1. The authorities are shifting the composition of spending toward new priority areas. These include several large public infrastructure projects (e.g., railways and ports); supporting PEMEX to increase oil production and refining capacity (including via tax reductions and capital injections); doubling old-age pensions; programs for the youth (i.e., more student scholarships and the apprentice program “Youths Building the Future”); and expanding and unifying healthcare.2

2. This shift is happening within a tight budgetary envelope and against the backdrop of declining oil revenues and a slowing economy. The authorities have reiterated that they are not planning to raise taxes at least until 2021 or to finance these programs by increasing public debt. Shrinking revenues are particularly worrisome as Mexico already has the lowest tax-to-GDP ratio among OECD countries, and one of the lowest among Latin American economies. Consequently, fiscal pressures are emerging, and staff sees the need for 1.5 percent of GDP in measures to meet the authorities’ medium-term fiscal targets. While there is significant scope to raise revenues to close the gap, this note focuses on the potential for spending measures to contribute to filling the fiscal gap while making the spending mix more growth friendly and inclusive.

B. Spending Trends Prior to the Current Government

3. The post-GFC period saw a significant increase in public debt that was arrested only in 2016 through both an increase in non-oil revenues and cuts in spending. The counter-cyclical policy response during the global financial crisis expanded the overall deficit to an average of 4 percent in 2009–10 and increased budgetary spending from 20.1 percent of GDP in 2000–2007 to 24.5 percent in 2008–10. This policy response was warranted by the magnitude of the shock facing Mexico at the time and was broadly in line with the size of fiscal expansions in Mexico’s regional and emerging market peers (see Annex V). However, the deficit remained at around 4 percent of GDP for several years, leading to an increase of almost 20 percentage points in the public debt to GDP ratio between 2007 and 2016. The increase in debt was only arrested after 2016, following a reform in 2013–14 that raised tax revenues to offset the decline in oil revenues. At the same time, budgetary expenditures were cut by almost 2.8 percentage points of GDP between 2016 and 2018 while the decline in programmable budgetary spending amounted to 3.4 percentage points of GDP.

Mexico — Fiscal balance (in percent of GDP), 2004 -2018

Source: IMF FAD Expenditure Assessment Tool (EAT), World Economic Outlook.

Gross Debt and PSBR in Percent of GDP

4. A decomposition of programmable budgetary spending raises questions about the quality of the post-GFC shift in spending composition. Table 1 compares average programmable expenditure as a percent of GDP in 2008–2017 with spending in 2018 across both economic and functional classifications. Decomposing by economic classification indicates that the decline in programable spending of 2.3 percentage points can largely be explained by a reduction in capital expenditure, and, to a lesser extent, by a fall in wages and salaries as well as a decline in subsidies and transfers, mostly in education, health and housing and community services (Table 1).3 Areas in which spending increased include pensions and interest payments. Moving to a functional classification of spending—also shown in (Table 1—expenditure is higher than its historical average only in social protection. The size of the increase is equal to the rise in pensions in the economic classification, implying that it is due mainly to increases in social pensions while other social assistance expenditure and non-social pensions remained broadly unchanged.

Table 1.Mexico: Public Spending, Average 2008–2017, and 2018(Percent of GDP)
Functional Classification
Total Programmable ExpenditureGeneral Public ServicesDefensePublic Order and SafetyEconomic AffairsEnvironmental ProtectionHousing and Community ServicesHealthRec/CultureEducationSocial ProtectionOther (incl Stabilization Fund)
Economic ClassificationTotal Programmable Expenditure19.617.31.00.90.50.50.30.26.45.10.20.11.51.02.52.40.10.13.53.03.43.80.30.2
Wages and Salaries5.75.20.60.50.30.30.10.10.90.80.00.00.00.01.41.30.00.02.32.00.10.10.10.1
Subsidies & Transfers3.32.70.00.10.00.00.10.00.60.60.00.00.40.20.60.60.00.01.00.90.50.40.0-0.1
Pensions2.93.30.00.00.00.00.00.00.00.00.00.00.00.00.00.00.00.00.00.02.93.30.00.0
Other Current Expenditure2.82.80.20.30.10.10.10.11.61.60.00.00.00.00.60.50.00.00.00.00.10.10.10.1
Physical Capital4.02.60.10.00.10.10.00.02.51.60.10.01.10.70.10.10.00.00.10.10.00.10.0-0.1
Other0.90.70.00.00.00.00.00.00.00.00.00.00.00.00.00.00.00.00.00.00.00.00.00.0
Interest2.12.60.00.00.00.00.00.00.00.00.00.00.00.00.00.00.00.00.00.00.00.00.00.0
Color code:at least 10% lesat least 10% less [low quality>10%Long-term average [2003–2017]
Source: Authorities’ data and authors’ calculationsNote: Assessment of the quality of adjustment (yellow versus green) is based on staff’s judgement.
Source: Authorities’ data and authors’ calculationsNote: Assessment of the quality of adjustment (yellow versus green) is based on staff’s judgement.

C. Projected Spending Trends Under the Current Fiscal Plans

5. The ongoing fiscal adjustment under the current administration appears to reinforce these trends. (Tables 2 and (3 show the economic and functional breakdowns of spending, respectively, in 2019 and 2020 compared to 2018 and the 2008–2017 average. Total programable expenditure is projected to decline by another ¾ percent of GDP from 2018 to 2020. While pension spending is expected to continue increasing significantly, non-PEMEX related physical capital spending is set to decline further. Moreover, cuts of 0.7 percent of GDP are envisaged in other current spending, implying a decline by a quarter. From a functional perspective, spending cuts are envisaged in education, and housing and community services, which are areas in which spending ratios to GDP had already contracted in prior years.

Table 2.Mexico: Projected Public Spending in 2019–2020 (Economic Classification)(Percent of GDP)
Total Programmable Expenditure
Average (2008–2017)201820192020
Economic ClassificationTotal Programmable Expenditure19.617.316.716.6
Wages and Salaries5.75.25.05.0
Subsidies & Transfers3.32.72.72.7
Pensions2.93.33.63.7
Other Current Expenditure2.82.82.72.4
Physical Capital4.02.62.62.5
Other0.90.70.20.2
Interest2.12.62.72.6
Color code:at least 10% less
at least 10% less (low quality)
> 10%
Long-term average (2008–2017)
Note: Authorities’ data and authors’ calculations.
Note: Authorities’ data and authors’ calculations.
Table 3.Mexico: Projected Public Spending in 2019–2020 (Functional Classification)(Percent of GDP)
Total Programmable Expenditure
Average (2008–2017)201820192020
Functional ClassificationTotal Programmable Expenditure19.617.316.616.7
General Public Services1.00.90.90.9
Defense0.50.50.40.4
Public Order and Safety0.30.20.20.2
Economic Affairs6.45.14.64.6
Environmental Protection0.20.10.10.1
Housing and Community Services1.51.01.00.9
Health2.52.42.42.4
Rec/Culture0.10.10.10.1
Education3.53.02.929
Social Protection3.43.84.24.3
Other (incl Stabilization Funds)0.30.20.10.0
Color code:at least 10% less
at least 10% less (low quality)
> 10%
Long-term average (2008–2017)
Source: Authorities’ data and authors’ calculations
Source: Authorities’ data and authors’ calculations

6. The fact that the planned spending cuts fall on similar expenditure items as in previous years raises questions about the sustainability of the adjustment. Given that legally-mandated expenditures represent 2/3 of the budget, while another 20 percent is comprised of technically discretionary but inflexible expenditures, spending cuts continue to focus on a small share of effectively discretionary expenditures—including vital capital investments. Moreover, while social protection spending is on the rise, spending in areas such as education, health and housing and community services is declining. Cutting other current expenditure by a full quarter, from an already low level within a year or two also raises sustainability concerns. Achieving a more growth-friendly and inclusive spending mix, while making space for the authorities’ medium-term objectives would require reallocating expenditure toward capital spending and education, while also making efficiency improvements in all areas. One area in which such improvements appear feasible is social spending which is the subject of the subsequent section.

Change in Total Spending (in percent of GDP), 2007–2018

Source: IMF FAD Expenditure AssessmentTool (EAT), World Economic Outlook.

7. A focus on outturns for 2019 suggests large declines in capital spending while social protection spending grew at above 10 percent in real terms. (Tables 4 and (5 compare the expenditure outturns in the first eight months of 2019 with the same period in 2018 based on economic and functional classifications in real terms. The calculations suggest that physical capital spending declined by 14.6 percent while health and education expenditure also declined notably by 4.2 percent and 5.3 percent, respectively. Nevertheless, spending on other categories such as public order and safety, environmental protection, recreation and culture, general public services and economic affairs declined even more dramatically, while social protection spending grew significantly at 10.3 percent.

Table 4.Mexico: Spending Outturns in 2019(Economic Classification)
Total Programmable Expenditure(Billion pesos)
January-August 2018January-August 2019Real % growth
Economic ClassificationTotal Programmable Expenditure26092590-4.6
Wages and Salaries735729-4.6
Subsidies & Transfers497480-7.0
Pensions5285734.4
Other Current Expenditure3743852.9
Physical Capital476423-14.6
Interest3894244.9
Source: Authorities’ data and authors’ calculations
Source: Authorities’ data and authors’ calculations
Table 5.Mexico: Spending Outturns in 2019(Functional Classification)
Total Programmable Expenditure (Billion pesos)
January-August 2018January-August 2019Real % growth
Functional ClassificationTotal Programmable Expenditure26092590-4.6
General Public Services139112-18.1
Defense6868-4.1
Public Order and Safety3526-28.3
Economic Affairs792720-12.5
Environmental Protection1310-24.9
Housing and Community Services1591681.2
Health343342-4.2
Rec/Culture1311-14.2
Education441434-5.3
Social Protection59267910.3
Source: Authorities’ data and authors’ calculations
Source: Authorities’ data and authors’ calculations

D. Benchmarking Social Spending (Functional Classification)

8. Current trends in social spending will determine the structural increase in public expenditure over the long term. We define social spending to include education, health, social protection, housing and community services, and environmental protection. Spending trends in these areas will be shaped by the government’s policy goals of boosting social assistance and achieving universal secondary education and universal access to basic health insurance as well as by rising healthcare and social protection spending related to an aging population.

Social Spending vs. Tax/SSC Revenues

Source: OECD (2016).

Mexico: Public Social Spending Components

(Percent of GDP)

Sources:SHCP and staff calculations

9. We track the evolution of social spending in Mexico over time and benchmark its current level against peers. In addition to social protection spending (defined below), social spending includes education and health expenditure—reflecting the critical importance of such spending for promoting inclusive growth. Social spending as a share of GDP increased by 2.5 percent of GDP from 2007 to 2015, reaching a maximum of 12.1 percent of GDP, before shrinking to 10.3 percent in 2018. Social protection and education spending together absorb more than 60 percent of the total, while health expenditure amounts to close to a fourth. From a cross-country perspective, Mexico currently has one of the lowest levels of social spending, partly reflecting its low tax to GDP ratio, but such spending is set to increase over time.

10. We also estimate the level of spending required to reach satisfactory progress towards the Sustainable Development Goals (SDGs) in the health and education sectors. We follow the input-output methodology of Gaspar and others (2019) in three steps: (i) identifying key inputs and their associated unit cost in the health and education sectors; (ii) benchmarking the input costs in Mexico to countries with comparable GDP per capita levels but higher social outcomes today; and (iii) estimating the spending levels needed to achieve those high-quality outcomes, given Mexico’s GDP per capita and population growth. Estimates are reported for 2030 in percent of GDP.

Health

11. Mexico’s healthcare system is fragmented, service delivery is unequal, and administrative costs are high. Mexico’s spending on healthcare is comparable to countries with similar GDP per capita levels. However, the multiplicity of insurance schemes (each with its own parallel provider network, funding and administrative structures), and the lack of coordination between them increase the administrative and insurance costs of health services and contribute to unequal service delivery. Administrative costs account for almost 10 percent of total health spending and insurance premiums are high. Aligning the administrative and insurance costs with the OECD average of 3 percent would generate savings of at least 0.15 percent of GDP (World Bank, 2016). Spending also remains concentrated in the richest states, resulting in disparities in care quality and access. Finally, there are significant beneficiary overlaps and inconsistencies across insurance schemes which, if eliminated, would lead to further fiscal savings (more than 0.1 percent of GDP).

Health Expenditure—Different Metrics, Latest Value Available

Source: IMF FAD Expenditure Assessment Tool (EAT), World Bank, World Health Organization.

12. The costing exercise suggests that health spending will have to increase if SDG for health is to be reached by 2030. Mexico could aim to increase the share of doctors in the population as well as their wages while containing the number of other health professionals (Table 4). Overall, by 2030, Mexico could face an increase of more than 0.5 percent of GDP in total health expenditure to meet the SDGs. Fiscal pressures would be higher if the share of public sector in total health-care provision increases. All these trends necessitate seeking efficiency gains in the interim period, otherwise the spending required to reach the SDGs would be significantly larger.

Table 6.Mexico: Cost Estimates for Health
GDP per capita $6000-$15000Mexico
AllLow performanceHigh performance2016 (or latest)2030
GDP per capita8,909.58,115.812,623.28,814.910,234.4
Main factors
Doctors per 1,000 population2.01.92.72.22.7
Other medical personnel per 1,000 population6.46.37.79.67.7
Doctor wages (ratio to GDP per capita)4.14.24.03.54.0
Other current and capital spending (% total spending)59.860.959.858.558.5
Private share (% total spending)39.547.831.647.831.6
Results
Health spending (percent of GDP)6.45.97.15.96.4
Public3.93.14.93.14.4
Private2.52.82.32.82.0
Per capita spending (USD 2018)570.4482.3899.5523.8653.6
SDG3 index80.178.285.881.9>84
Source: Staff calculations using “IMF SDG Costing Tools”.
Source: Staff calculations using “IMF SDG Costing Tools”.

Education

13. Enhancing the quality of education spending is not only important for fiscal sustainability, but also critical for growth and competitiveness. Given the projected demographic trends in Mexico and the constitutional mandate to universalize secondary education, the coming years will likely see a large expansion in education services and a sector-wide shift towards secondary and tertiary levels (to supply the human capital needed for the new economy). These factors are expected to generate significant structural fiscal pressures, thus, underscoring the need to enhance value for money in education spending.

14. Improving transparency and accountability in the education payroll, along with a rebalancing of spending towards investment in equipment and facilities would result in efficiency gains. The share of current spending in total education expenditure is very high, potentially crowding out investment in equipment, facilities, information technology and modern infrastructure necessary to improve education quality and keep pace with the evolving labor demands of a growing economy (World Bank 2016). Shifting the composition of education expenditures toward capital spending is therefore warranted. Improving the quality of early-childhood education, access to education in low-coverage regions and for disadvantaged-background children would also lead to better outcomes.

Government Education Expenditure, Latest Value Available

Source: IMF FAD Expenditure AssessmentTool (EAT), World Bank.

15. Seeking efficincy gains is particularly important as there will be additional education spending pressures in the long term if SDGs in education are to be achieved. Additional spending needs are estimated at 0.5 percent of GDP by 2030. To improve outcomes and consistent with the discussion above, the SDGs costing exercise in the education sector suggests that Mexico should recalibrate the mix of salaries and personnel to emulate the levels observed in high performing countries, which tend to have lower teacher wages (in percent of GDP) but also smaller classes (lower student to teacher ratios). Enrollment rates should also be increased.

Table 7.Mexico: Cost Estimates for Education
GDP per capita 6000–15000Mexico
AllLow performanceHigh performance2018 (or latest)2030
GDP per capita9,159.58,408.512,390.38,814.510,234.4
Main factors
Students per teacher ratio14.318.311.319.211.3
Teacher wages (ratio to GDP per capita)1.72.31.62.91.6
Other current and capital spending (% total spending)45.843.346.628.746.6
Other
Student age population (% total population)35.740.223.242.030.0
Enrollment rate (preprimary to tertiary)77.572.385.672.280.2
Private share (% of total spending)12.820.710.116.810.1
Results
Education spending (percent of GDP)6.16.55.46.16.6
Public5.35.14.95.35.9
Private0.81.30.50.88.7
Spending per student (USD 2018)2,019.61,872.93.3880.41,768.72,792.2
SDG4-index82.778.088.592.6>84
Source: Staff calculations using “IMF SDG Costing Tools”.
Source: Staff calculations using “IMF SDG Costing Tools”.

Social protection

16. The IMF defines social protection spending to comprise social insurance and social assistance programs. Social insurance aims at protecting households from shocks that can adversely impact their incomes and welfare and is typically financed by contributions or payroll taxes. Social assistance aims at protecting households from poverty and is financed by general government revenue. The terms social assistance and social safety net are used interchangeably.

17. Mexico’s social protection programs are fragmented and there is much potential for efficiency gains. Existing social assistance and insurance programs should be carefully reviewed, and the process of rationalization should continue. There are more than 8,000 programs at the federal, state and municipal levels. This multiplicity has resulted in a significant degree of duplication, redundancy and fragmentation—reducing the effectiveness and efficiency of the social protection system. Some programs suffer from significant leakages to higher-income groups or other unintended beneficiaries. A few programs were eliminated or scaled down in January 2019, but others were newly established or scaled. To improve targeting, the authorities conducted a social census covering about 20 million households (out of a total of 30 million households) to identify those in need. If possible, this census should be used to clean an existing beneficiary database—the Sistema de Información Social Integral (SISI)—which collects data from social programs at all levels of government. Matching SISI with the social census to create a single registry of beneficiaries would improve the overall targeting efficiency. It could also reduce errors of inclusion and exclusion, beneficiary overlaps, and program duplications.

18. The overall envelope for social assistance—which is part of social protection—is comparable in size to Mexico’s peers, but is likely to grow. The administration spent about 1.8 percent of GDP on social assistance programs in 2018 (text chart). This level is comparable to other Latin American countries and EMDEs but is lower than the OECD average. In the medium- to long-term, Mexico’s aging population will put increasing pressure on different elements of the social protection system, including social assistance. The main schemes included: cash, food and in-kind transfers; fee waivers and subsidies, and social pensions to the elderly (PAM).4 Transfers and PAM represented about 40 percent of the total social assistance received by an average household in Mexico and mostly benefit households at the bottom of the income distribution. However, other social assistance programs are less well targeted and suffer from inefficiencies (IMF Country Report 18/308). The 2019 and 2020 budgets increased the size of social assistance spending by about 0.5 percent of GDP and changed its composition—with a significant increase in social and disability pensions and a modest decrease in transfers. The conditional cash transfer program Prospera has been canceled and its resources have been distributed to other priority areas. To reduce exclusion errors, the authorities are targeting indigenous groups, elderly, and people with disabilities.

Mexico: Social Assistance Spending

(Percent of GDP)

Source: SHCP

Social Assistance Spending (in percent of GDP). Latest Value Available

Sources: IMF FAD Expenditure Assessment Tool (EAT), World Economic Outlook, ASPIRE, and IMF Pension Indicators.

Social Assistance Coverage and Benefit Share of Poorest 20 percent (in percent). Latest Value Available 1/2/

Sources: IMF FAD Expenditure Assessment Tool (EAT), World Economic Outlook, ASPIRE, and IMF Pension Indicators.

Coverage of government transfer programs by household income quintile (2016)

Note: Coverage is computed at the household level.

Sources: INEGI; IMF staff calculations

19. A need for old age social assistance—and other non-contributory social pensions—has arisen amid a pension system that has limited coverage and low contribution rates. Multiple pension systems cover private sector employees, different categories of civil servants at different government levels, SOEs, public universities and military personnel. The poverty rate among people over 65 is very high, at more than 30 percent, in part due to insufficient benefits from the contributary Pension system. This increases the need for social pension spending (and social assistance spending in general). The average contribution rate of 6.5 percent in IMSS for the DC scheme is very low and may at best lead to a replacement rate of 26 percent for a full career average earner, the second lowest replacement rate among OECD countries (OECD 2019). Increasing the contribution rate would improve adequacy and could in part be offset by reducing the rate of contribution from wages to the housing fund (Infonavit). Further adjustments could include increasing the effective retirement age by linking the statutory retirement age to gains in life expectancy; tightening early-retirement schemes; increasing the contribution period required for a full pension in the old public-sector DB scheme; and increasing the age limit to get a full pension in the public sector faster (OECD 2015).

Pension Indicators, Latest Value Available

E. Conclusions

20. Low levels of discretionary spending imply that raising revenues will be indispensable in putting public debt on a downward path. There is substantial room for tax policy and revenue administration reforms to raise revenues and ensure that public debt remains on a downward path.

21. Spending efficiency should be strengthened to make additional room for priority expenditures. The burden of the fiscal adjustment in recent years has continuously fallen on a small number of discretionary spending items such as capital spending, health and education, thus hurting inclusive growth. Spending adjustments should concentrate on boosting spending efficiency, including in social spending. Enhancing value for money in social spending is particularly important given the additional spending needs to meet the SDGs in education and health.

References

    Gaspar, V.,D.Amaglobeli,M.Garcia-Escribano,D.Prady, andM.Soto,2019. Fiscal Policy and Development: Human, Social, and Physical Investments for the SDGs. International Monetary Fund.

    • Search Google Scholar
    • Export Citation

    IMFCountry Report 18/308. Mexico: Selected Issues. International Monetary Fund. Washington DC.

    OCED, 2015. OECD Reviews of Pension Systems: Mexico. OECD Publishing, Paris.

    OECD, 2019. OECD Economic Surveys: Mexico 2019. OECD Publishing, Paris.

    World Bank, 2016. Mexico Public Expenditure Review, World Bank.

1

Prepared by Mehdi Raissi and Christian Saborowski

2

The profit-sharing duty is expected to decrease from 65 percent in 2019 to 58 percent in 2020 and to 54 percent in 2021—equivalent to a forgone tax revenue of $2.3 billion in 2020 and $4.3 billion in 2021 (0.2 and 0.3 percent of GDP, respectively). The government will also provide direct capital injections of $7.3 billion (about 0.7 percent of GDP) over three years.

3

As discussed in Section D, a shift away from current expenditure within education spending could be justified.

4

The PAM benefits about 8 million individuals; 60 percent of those aged 65+, and 100 percent of those aged 68+.

Other Resources Citing This Publication