## wpiea2020215-print-pdf

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### Box 1 — Government Fiscal Response to Covid-19: Measures and Magnitudes
- Above-the-budget-line fiscal measures:
  - Health spending: 0.2 percent of GDP.
  - Support to households and firms: 0.5 percent of GDP.
- Below-the-budget-line measures and contingent liabilities: 0.5 percent of GDP.
- Specific measures and amounts:
  - Frontloading two bimesters payments of the old-age and disability pensions.
  - Accelerating procurement processes and VAT refunds.
  - Lending to firms and workers in both formal and informal sectors.
  - Providing liquidity support through development banks.
  - Loans with optional repayments to 1 million SMEs that maintain employees on payroll, self-employed and domestic workers: 25 thousand pesos per loan.
  - Loans with optional repayments to another 1 million family businesses previously registered in the Welfare Census: 25 thousand pesos per loan.
  - Subsidized unemployment insurance for 3 month to workers that hold a mortgage with the Housing Institute: 7.3 billion pesos.
  - Additional social spending related to infrastructure, security, education, and other areas: 50 billion pesos.
  - Frontloaded social pension payments for the elderly and disabled people by 4 months.
  - ISSSTE’ housing credits for government workers (low-interest rate loans): total amount of 35 billion pesos.
  - Personal loans at a low rate: 3 billion pesos.
  - Development banks to extend loans amounting 64.5 billion pesos, largely to SMEs.

### Near-term Policy Objectives, Priorities, and Design Principles
- Primary objectives in early stages:
  - (1) save lives by containing the spread of the disease and treating those who are infected;
  - (2) protect livelihoods from the economic fallout of Covid-19.
- Priorities:
  - Fully accommodate spending on health care.
  - Adopt timely, temporary, and targeted fiscal actions to protect people and firms, including in hard-to-reach informal sectors.
- Overarching principles:
  - Lifelines should be cost-effective and transparently embedded in medium-term budget frameworks.
  - Where possible, build on existing programs to facilitate timely support.
  - Financing constraints determine extent of emergency lifelines and broad-based fiscal stimulus.
- Recommended near-term fiscal support components:
  - Healthcare: universal free coverage for Covid-19 treatment with no out-of-pocket expenditure.
  - Support to households: use existing social safety nets (social census covering about 20 million households out of a total of 36 million; Sistema de Información Social Integral (SISI)) or create a merged single registry; delivery via existing safety nets, lower utility bills, mailing checks, bank accounts, fintech.
  - Other household measures: deferring social security contributions, deferring tax payments, deferring/reducing mortgage and consumer loan payments, government-funded sick and family leave, relaxing access to social security savings.
  - Support to firms: tax and social security contribution deferrals; accelerated payments and VAT refunds; clearing public sector arrears; loans and/or credit guarantees with risk sharing; direct lending against collateral; wage subsidies conditional on retaining employees.
  - Caution: avoid general tax rate cuts and holidays; prolonged deferral of social security contributions risks pension system viability.

### Aggregate Near-term Cost Estimates
- Grouped and costed categories:
  - Additional health expenditure: 0.6-1.5 percent of GDP.
  - Support to households: about 1.2 percent of GDP.
  - Support to firms (including wage subsidies of 0.4 percent of GDP).
  - Increased investment: 0.4 percent of GDP.
- Overall estimated cost of emergency lifelines: 2.5-3.5 percent of the 2020 GDP.
  - Note: excludes support in the form of loans, equity injections, and credit guarantees.

### Health Cost Modeling, Rationale, and Parameterized Scenarios
- Benchmark: average health spending on Covid-19 in G20 and regional peers is 0.6 percent of GDP; Mexico’s current Covid-related health spending is 0.2 percent.
- Modeling approach: combines a simple SIR epidemiological model with assumptions about pre-pandemic spare capacity, cost of providing care, and cost of increasing health sector capacity; captures non-linear capacity constraints.
- Estimated ranges:
  - Total health cost: 0.7-1.7 percent of GDP.
  - Public health cost: 0.6-1.5 percent of GDP.
- Two epidemiological scenarios (selected parameter values preserved exactly):
  - K0: 0.4 and 0.4.
  - ρ0: 2.4 and 2.3.
  - ρ1: 1.3 and 1.5.
  - W8: 10 and 10.
  - S0: 0 and 0.
  - α1: 1 and 1.
  - Scale up z: 1.1 and 1.1.
  - Scale up mortality: 1.1 and 1.1.
  - H Δδ RNH: 0.03 and 0.03.
  - av0: 0.05 and 0.05.
  - nb0: 0.1 and 0.1.
  - cap: 1.25 and 1.5.
  - cm: US$5,000 and US$5,000.
  - cnb: US$25,000 and US$25,000.
  - Fc_100: US$1,000,000 and US$1,000,000.
- Scenario outcomes:
  - Scenario 1: new cases of 16 percent of population by the first year; cap parameter implies capacity increase cap of 25 percent.
  - Scenario 2: new cases of 53 percent of population by the first year.

### Support to Households: Coverage, Estimates, and Targeting
- Pre-Covid-19 social safety net:
  - Current spending about 2.2 percent of GDP on social safety nets.
  - Around 8,000 social protection programs at federal, state, and municipal levels.
  - Programs cover 22.9 million Mexicans in 2020 (equivalent to 16 million households or 44.5 percent of total).
- One-year cost of increased household assistance included in 1.2 percent of GDP estimate:
  - 3-month support of 2036 pesos per month for people at risk of extreme poverty: 0.3 percent of GDP.
  - 3-month support of 2036 pesos per month to informal workers in construction, trade, and services: 0.3 percent of GDP.
  - Readily eligible beneficiaries and those eligible but not receiving assistance in 2019: combined 0.6 percent of GDP.
- Two estimate approaches for expanding SSNs:
  - Estimate 1 (readily eligible individuals): expanding coverage to 8,873,924 beneficiaries who were eligible but did not receive assistance in 2019: MXN 137 billion or 0.6 percent of GDP; a 30 percent increase scenario (2,815,133 beneficiaries) implies around 0.2 percent of GDP.
  - Estimate 2 (those at risk of poverty): using CONEVAL’s 6.1-10.7 million increase in extreme poverty implies temporary support to 6.1-10.7 million people costs 0.2-0.3 percent of GDP for 3 months at MXN 2036.12 per month per individual.
- Expanding social safety nets caveats:
  - Costs sensitive to monthly support amount, duration, and duration of the shock.
  - Example partial ranges: 0.6 percent of GDP, while 12 months of support would amount to 0.7-1.2 percent of GDP.

### Support to Informal Workers: Scope, Assumptions, and Costs
- Labor market informality and baseline counts:
  - Total workers: about 56 million.
  - Formal workers (Alvarez and Ruane 2019): about 23.5 million (around 21 million insured by IMSS).
  - Formal workers in construction, trade, and services in 2019: 10.5 million.
  - Assumption: 58 percent informal share implies implied informal workers (sectoral approximation): 14.6 million.
  - Sector-specific lockdown parameter assumed: around 0.7.
  - Implied informal workers from these sectors requiring support: around 10 million.
- Support design example and costing:
  - 3-month income support of MXN 2036.12 per month to 10 million informal workers: MXN 61.6 billion, equivalent to 0.3 percent of GDP.
  - Sensitivity: targeted-sector 3-month support ranges 0.1-0.5 percent of GDP.

### Support to Firms and Credit Rollover Mitigation
- Support to firms estimated at 0.4 percent of GDP (wage subsidies: 6-month support of 2036 pesos per month to IMSS-insured workers of formal firms in construction, trade, and services).
- Banking sector context:
  - Banking sector credit to SMEs amounts to 11 percent of GDP.
  - Assuming average maturity of 3 years, about 1 percent of GDP of credit falls due each quarter.
  - Rollover risk mitigation: development banks extending loans against collateral for about 1-2 percent of GDP, or sharing/backstopping credit risk with commercial banks to facilitate rollover.

### Accelerated/Additonal Investment Costing
- Authorities allocated 0.2 percent of GDP to social spending including public works, security and education in response to Covid-19.
- Proposal: increase to 0.4 percent of GDP for maintenance and restarting delayed projects to recuperate a fraction of private investment lost.
- WEO projection context: private fixed investment decreased from 17.7 percent of GDP (pre-Covid-19) to 16.5 percent of GDP in July 2020, a decline of 1.2 percentage points; replacing a quarter of lost investment implies around 0.4 percent of GDP.

### Medium-term Fiscal Reforms: Objectives and Revenue Targets
- Rationale: social spending will increase rapidly and other expenditure pressures emerge; revenues must rise from current low levels.
- Goal: deliver at least 3 percent of GDP in additional tax revenues centered on improving VAT performance, rationalizing inefficient and regressive income tax expenditures, and widening the top personal income tax bracket.

### VAT Reform: Performance, Gaps, and Recommendations
- VAT performance (2019):
  - Net of refunds, VAT reached 3.9 percent of GDP.
  - OECD average: 7.0 percent of GDP.
  - Latin America average: 7.3 percent of GDP.
  - VAT C-efficiency: 29 percent (Latin America average C-efficiency: 50 percent).
- Sources of low C-efficiency:
  - Narrow base due to tax expenditures and zero ratings/exemptions: 1.43 percent of GDP in 2019 (0.26+1.17 in Table 3).
  - Exclusions owing to informality and high non-compliance (IMF 2018 estimated compliance gap of 45.8 percent of potential revenue in 2016, or 2.41 percent of GDP).
- Policy recommendations:
  - Reduce policy gap: eliminate domestic zero-rate items except key foodstuffs and reduce exemptions — expected revenue boost: more than 1 percent of GDP; accompany with strengthened social safety nets estimated cost about 0.5 percent of GDP.
  - Reduce compliance gap: comprehensive strategy per 2018 IMF technical assistance — potential revenue gains: 1 percent of GDP.
  - Overall potential: fundamental VAT reforms could increase revenues by at least 2 percent of GDP; raising VAT C-efficiency to Latin America average (50 percent) would increase revenue by more than 2 percent of GDP.
  - Political-economy caveat: revenue gains take time; consider partial improvements if “first-best” is infeasible.

### PIT, CIT, and Other Tax Opportunities
- PIT:
  - PIT revenues in Mexico are some 5 percent of GDP less than the OECD average.
  - Tax expenditures for PIT: close to 1 percent of GDP in 2019.
  - Authorities consider at least 0.5 percent of GDP of these tax expenditures inefficient or regressive and could be rationalized.
  - Potential revenue gains from PIT reforms: about 0.5-1 percent of GDP.
- CIT:
  - CIT rate: flat 30 percent.
  - CIT revenue: 3.6 percent of GDP (OECD average CIT revenue: 2.8 percent of GDP).
  - Assessment: limited scope for further CIT gains relative to VAT and PIT.
- Other taxes:
  - Gasoline excise: revoking current formula could provide some ¼ percent of GDP in additional revenues.
  - Subnational taxes: property taxation currently 1.5 percent of GDP less than Latin American average; aim to collect at least ¾ percent of GDP by closing gap; complement with redesigned vehicle registration tax.

### Public Investment and Health Spending in the Medium Term
- Medium-term public investment package:
  - Increase public investment by 1.5 percent of GDP, out of which a third is allocated to healthcare.
  - Public investment increase (excluding health): around 1 percent of GDP.
  - Context: investment spending declined from an average of 4 percent of GDP over 2008-2018 to 2½ percent in 2019.
- Health spending:
  - IMF (2019a) computes an increase in health spending of ½ percent of GDP is needed over the medium-term to make satisfactory progress toward the SDGs in health by 2030.

### Strengthening Social Safety Nets and Consideration of Unemployment Insurance
- Need: Mexico lacks a nationwide unemployment benefits system; pandemic likely to have adverse impact on poverty and inequality for years.
- Desirable SSN attributes:
  - Broad coverage and adequate progressive benefits.
  - Cost effectiveness by avoiding program fragmentation and beneficiary overlaps.
  - Preservation of work incentives and enhancement of human capital via linking transfers to programs.
  - Financial sustainability within expenditure envelope.
- Current issues: gaps in coverage, fragmentation, beneficiary overlaps, leakage of benefits to higher-income groups.
- Recommendations:
  - Expand coverage cost-effectively via proxy-means targeting using statistical scoring.
  - Decrease duplications by strengthening administrative capacity and creating a single registry.
  - Use instruments for reaching the informal sector: mobile money, in-kind transfers, community-based identification.
  - Consider designing a nation-wide unemployment benefits system.

### IV. Macroeconomic Impact — The “Fiscal Twist” and GIMF Calibration
- First-year assumed fiscal impacts (emergency lifelines):
  - First-year overall fiscal deficit increase: 2.5 percent of GDP.
  - Expenditure increases (first year): government consumption 0.5 percent of GDP; government investment 0.5 percent of GDP (0.1 percent healthcare); targeted social transfers 1.2 percent of GDP.
  - Revenue: wage subsidies reflected as decline in labor tax: 0.3 percent of GDP.
- Second year and medium-term (fully anticipated):
  - Second-year overall fiscal deficit increase: 1.0 percent of GDP.
  - Second-year expenditure: maintain higher public investment: 0.5 percent of GDP for healthcare; enhance social safety nets: about 0.5 percent of GDP (0.2 percent poverty-reduction; 0.3 percent to alleviate regressive VAT reform).
  - Revenue from proposed tax reform (from third year): 2.0 percent of GDP composed of: broadening PIT and increasing social security contributions 0.5 percent of GDP; improving VAT performance 1 percent of GDP; broadening CIT base 0.2 percent of GDP; increasing property/local taxes 0.3 percent of GDP.
  - Additional public investment (third year): 1 percent of GDP.
  - Assumption: medium-term tax reforms perceived as credible lower the risk premium by 50 basis points.
- GIMF model calibration key Mexico parameters (Percent):
  - Inflation: 3.0
  - Share of liquidity constrained households: 50
  - Government consumption/GDP: 15.7
  - Net acquisition of nonfinancial assets/GDP: 1.3
  - Private investment/GDP: 18.6
  - Government transfer/GDP: 5.4
  - Tax and SSCs revenue/GDP: 15.4
  - Labor tax incl. SSCs/GDP): 5.6
  - Consumption tax (% GDP): 5.8
  - CIT revenue (% GDP): 3.6
  - Property and other taxes/GDP: 0.5
  - Other revenue/GDP: 8.7
  - Gross public debt/GDP: 53.7

### GIMF Inputs (values in percent of January 2020 WEO GDP) — Table 4 Summary
- Government deficit (expenditure-revenue) by t=1..6: 2.5, 1.0, 0.0, 0.0, 0.0, 0.0
- Total expenditure by t=1..6: 2.2, 1.0, 2.0, 2.0, 2.0, 2.0
  - Government consumption (t=1): 0.5
  - Government investment by t=1..6: 0.5, 0.5, 1.5, 1.5, 1.5, 1.5
  - Targeted transfers by t=1..6: 1.2, 0.5, 0.5, 0.5, 0.5, 0.5
- Total revenue by t=1..6: -0.3, 0.0, 2.0, 2.0, 2.0, 2.0
  - Labor tax (incl. social security contribution) by t=1..6: -0.3, 0.5, 0.5, 0.5, 0.5, 0.5
  - Consumption tax by t=3..6: 1, 1, 1, 1
  - Corporate Income tax by t=3..6: 0.2, 0.2, 0.2, 0.2
  - Property tax (lumpsum tax) by t=3..6: 0.3, 0.3, 0.3, 0.3
- Sovereign risk premium (basis point) by t=1..6: -50, -50, -50, -50, -50, -50
- Note: Health spending classified as part government consumption, part government investment.

### GIMF Model Results and Scenarios
- Expenditure measures only:
  - Expenditure measures expected to increase level of GDP by 1.2 percent in the first year, and by 2 percent over the medium-term.
  - Increased demand expected to appreciate the real exchange rate and deteriorate the current account.
  - Without revenue reforms, public debt would increase by 9 percentage points of GDP in the medium term.
- Total package (expenditure + tax reforms + 50 bps risk premium decline):
  - Output gains and a stable public debt path.
  - Level of GDP higher relative to January 2020 WEO baseline in the first year; output expected to continue to increase by about 3.6 percent in the long run (in eleven years).
  - Real exchange rate: appreciate in first few years, eventually depreciate as tax reforms are enacted.
  - Current account: deteriorate initially, then improve over the medium term.
- With monetary accommodation and higher investment efficiency:
  - Monetary accommodation scenario: medium-term output could increase by 3.2 percent; government deficit could fall 0.4 percentage points; government debt could fall by 2.2 percentage points.
  - Public investment efficiency 30 percent higher: output improving by 4.1 percent over the medium term; government deficit falling by 0.6 percentage points; government debt declining by 3.5 percentage points.
- Conclusion: improved composition of fiscal policy and credible reforms yield sizable medium-term gains; supportive monetary and structural policies amplify benefits.

### V. Conclusions and Policy Recommendations
- Immediate needs:
  - Contain the pandemic, mitigate economic effects, facilitate rapid recovery, and rebuild fiscal buffers.
  - Near-term fiscal support estimated at around 2.5-3.5 percent of GDP required for health spending, social safety nets, wage subsidies, and public investment.
- Medium-term strategy:
  - Raise revenues by at least 3 percent of GDP through VAT performance improvements, PIT rationalization, and widening top PIT bracket; pair with strengthened social safety nets.
  - Increase public investment by 1.5 percent of GDP (one third to health) and raise health spending by ½ percent of GDP over the medium term to progress toward SDGs.
- Cross-policy considerations:
  - Monetary accommodation and higher public investment efficiency enhance output gains and improve fiscal metrics.
  - Prioritize transparent, cost-effective lifelines embedded in medium-term budgets and build on existing administrative systems to reach informal sectors.

*Source: wpiea2020215-print-pdf (IMF).*

### Section IV quantitatively simulates the macroeconomic effects of a growth-friendly mix of

### Section IV quantitatively simulates the macroeconomic effects of a growth-friendly mix of spending and revenue measures.

### Box 1. Government’s Fiscal Response to Covid-19 — Measures and Magnitudes
- Above-the-budget-line fiscal measures:
  - Health spending: 0.2 percent of GDP.
  - Support to households and firms: 0.5 percent of GDP.
- Below-the-budget-line measures and contingent liabilities: 0.5 percent of GDP (loans to formal workers and recently laid-off employees as well as contingent liabilities).
- Specific measures and amounts:
  - Frontloading two bimesters payments of the old-age and disability pensions.
  - Accelerating procurement processes and VAT refunds.
  - Lending to firms and workers in both formal and informal sectors.
  - Providing liquidity support through development banks.
  - Loans with optional repayments to 1 million SMEs that maintain employees on payroll, self-employed and domestic workers: 25 thousand pesos per loan.
  - Loans with optional repayments to another 1 million family businesses previously registered in the Welfare Census: 25 thousand pesos per loan.
  - Subsidized unemployment insurance for 3 month to workers that hold a mortgage with the Housing Institute: 7.3 billion pesos.
  - Additional social spending related to infrastructure, security, education, and other areas: 50 billion pesos.
  - Frontloaded social pension payments for the elderly and disabled people by 4 months.
  - ISSSTE’ housing credits for government workers (low-interest rate loans): total amount of 35 billion pesos.
  - Personal loans at a low rate: 3 billion pesos.
  - Development banks to extend loans amounting 64.5 billion pesos, largely to SMEs.

### II. Desired (Near-term) Policy Response to COVID-19 — Objectives and Principles
- Primary policy objectives in early stages:
  - (1) save lives by containing the spread of the disease and treating those who are infected;
  - (2) protect livelihoods from the economic fallout of Covid-19.
- Priorities:
  - Fully accommodate spending on health care.
  - Adopt timely, temporary, and targeted fiscal actions to protect people and firms, including in hard-to-reach informal sectors.
- Overarching principles (summary of guidance):
  - Lifelines should be cost-effective and transparently embedded in medium-term budget frameworks.
  - Where possible, measures should build on existing programs to facilitate timely support.
  - Financing constraints will determine extent of emergency lifelines and broad-based fiscal stimulus.
- Recommended near-term fiscal support components:
  - Healthcare:
    - Universal free coverage for Covid-19 treatment with no out-of-pocket expenditure.
  - Support to households:
    - Option 1: Use existing social safety nets and administrative infrastructure (social census covering about 20 million households out of a total of 36 million; Sistema de Información Social Integral (SISI)).
    - Option 2: Create a single registry by merging SISI with the social census to improve identification and reduce inclusion/exclusion errors.
    - Modes of delivery: existing social safety nets, lower utility bills, mailing checks, bank accounts for direct deposits, fintech instruments (e.g., mobile/online payments).
    - Other measures for formal workers: (i) deferring employees’ social security contributions; (ii) deferring tax payments; (iii) deferring and/or reducing mortgage, consumer loan, and utility bill payments; (iv) providing government-funded sick and family leave; (v) relaxing requirements for accessing social security savings for formal workers.
  - Support to firms:
    - Liquidity support options: tax and social security contribution deferrals; accelerated payments and VAT refunds; clearing public sector arrears; loans and/or credit guarantees (with credit risk sharing between government and commercial banks); direct lending against collateral; lending to SMEs with cross-checks of profitability; mechanisms to monitor and record fiscal risks.
    - Cost-reduction options: lower social security contributions; forgivable loans; wage subsidies conditional on retaining employees on payroll and restrictions on use of subsidies (no dividends, buybacks, or CEO bonuses).
    - Extension of wage subsidies to informal workers conditional on formalization as an alternative design; pre-pandemic around 12 million informal workers were employed in formal firms, or close to ⅕ of the workforce.
  - Cautionary notes:
    - Deferring social security contributions could affect the viability of an underfunded pension system if continued for an extended period.
    - General tax rate cuts and holidays should be avoided.

### A. How much does the near-term policy response cost? — Aggregate Estimates
- Grouped and costed categories:
  - Additional health expenditure: 0.6-1.5 percent of GDP.
  - Support to households: about 1.2 percent of GDP.
  - Support to firms (including wage subsidies of 0.4 percent of GDP).
  - Increased investment: 0.4 percent of GDP.
- Overall estimated cost of emergency lifelines: 2.5-3.5 percent of the 2020 GDP.
  - Note: excludes support in the form of loans, equity injections, and credit guarantees.

### Cost estimates of healthcare — Rationale, Model, and Ranges
- Rationale for increased health spending:
  - Benchmarking: average health spending on Covid-19 in G20 and regional peers is 0.6 percent of GDP, higher than Mexico’s current Covid-related health spending of 0.2 percent.
  - Mexico’s healthcare system is fragmented, service delivery unequal, and administration costs are high.
  - Pre-existing beds and physicians and health expenditure as a share of GDP are lower than many other countries; co-morbidity factors (obesity, diabetes) are elevated.
- Modeling approach:
  - Follows Dudine and others (2020): combines a simple SIR epidemiological model and assumptions about pre-pandemic spare capacity, cost of providing care, and cost of increasing health sector capacity.
  - Model captures non-linear effects: distribution of patients, capacity constraints (spare beds, ventilators, availability of doctors/nurses), technical constraints to expansion, and role of other policies.
- Estimated ranges:
  - Total health cost: 0.7-1.7 percent of GDP.
  - Public health cost: 0.6-1.5 percent of GDP (assuming different public versus private split, but more than 85 percent in both cases presented).
  - The estimates are sensitive to assumptions such as capacity expansion and reproduction number.

- Two epidemiological scenarios (parameter selections):
  - Scenario 1 and Scenario 2 parameter values (selected entries preserved exactly):
    - K0: 0.4 and 0.4.
    - ρ0: 2.4 and 2.3.
    - ρ1: 1.3 and 1.5.
    - W8: 10 and 10.
    - S0: 0 and 0.
    - α1: 1 and 1.
    - Scale up z: 1.1 and 1.1.
    - Scale up mortality: 1.1 and 1.1.
    - H Δδ RNH: 0.03 and 0.03.
    - av0: 0.05 and 0.05.
    - nb0: 0.1 and 0.1.
    - cap: 1.25 and 1.5.
    - cm: US$5,000 and US$5,000.
    - cnb: US$25,000 and US$25,000.
    - Fc_100: US$1,000,000 and US$1,000,000.
  - Scenario notes:
    - Scenario 1 assumptions result in new cases of 16 percent of population by the first year.
    - Scenario 2 assumptions result in new cases of 53 percent of population by the first year.
    - Scenario 1 assumes a capacity increase cap of 25 percent (cap parameter in Table 2).

### Cost estimates of support to households — Coverage and Magnitudes
- Mexico’s pre-Covid-19 social safety net:
  - Current spending about 2.2 percent of GDP on social safety nets (or social assistance).
  - Around 8,000 social protection programs at the federal, state, and municipal levels.
  - Programs cover 22.9 million Mexicans in the year 2020 (equivalent to 16 million households or 44.5 percent of total).
- One-year cost of increased household assistance:
  - Support to readily eligible beneficiaries and to people at risk of poverty and informal workers is incorporated into the 1.2 percent of GDP estimate for support to households.
  - Specific program assumptions used in costing:
    - 3-month support of 2036 pesos per month for people at risk of extreme poverty (as estimated by CONEVAL): 0.3 percent of GDP.
    - 3-month support of 2036 pesos per month to informal workers in construction, trade, and services sectors using sector-specific lockdown assumptions: 0.3 percent of GDP.
    - To readily eligible beneficiaries and to people who were eligible but did not receive assistance in 2019: combined 0.6 percent of GDP.

### Support to firms — Costing and Design
- Support to firms estimated at 0.4 percent of GDP.
  - Wage subsidies: 6-month support of 2036 pesos per month to IMSS-insured workers of formal firms in construction, trade, and services sectors using sector-specific lockdown assumptions: 0.4 percent of GDP.
- Boost public investment:
  - Increase good-quality public investment to support a fraction of private investment lost because of COVID-19: 0.4 percent of GDP.

*Source: https://www.imf.org/-/media/files/publications/wp/2020/english/wpiea2020215-print-pdf.pdf*

### 1.2 percent of GDP.

### 1.2 percent of GDP.

### Expanding the existing social safety nets
- The text presents two sets of estimates (Estimate 1 and Estimate 2) for the additional fiscal cost of expanding social safety nets in Mexico in response to the Covid-19 shock.
- Social protection spending is defined to comprise social insurance and social assistance programs. The terms social assistance and social safety net are used interchangeably in this paper.

### Estimate 1: Increase the coverage of social safety nets to readily eligible individuals
- Definition: Readily eligible individuals are those who have been deemed eligible but have not received any benefits yet.
- Using CONEVAL estimates (May 2020), the additional cost of expanding existing programs is estimated to be 0.2-0.6 percent of GDP, based on two scenarios:
  - First scenario:
    - Assumes full coverage of 8,873,924 beneficiaries who were eligible but did not receive any assistance in 2019.
    - Additional cost would amount to MXN 137 billion or 0.6 percent of GDP.
  - Second scenario:
    - Assumes a 30 percent increase in coverage (2,815,133 beneficiaries)—the increase in the percentage of the population in poverty between 2008 and 2010.
    - Estimated cost of around 0.2 percent of GDP.

### Estimate 2: Increasing coverage by including those at risk of poverty
- CONEVAL estimates that the total number of people in extreme poverty might increase between 6.1 and 10.7 million, based on various assumptions about the extent of income loss from Covid-19.
- UN/ECLAC projects a substantial increase of 14–21 million, assuming the population living in extreme poverty increases from 11.1 percent in 2019 to 14.9-17.1 percent in 2020.
- The Centre for Educational and Social Studies estimates that 11.5 million people could move out of the middle class into relative poverty.
- The pandemic's economic shock significantly expands those in relative and extreme poverty.

### Cost calculations and assumptions for temporary support
- Using the CONEVAL estimate, the cost of providing temporary support to 6.1-10.7 million people is 0.2-0.3 percent of GDP under these assumptions:
  - Each individual is provided an income support of MXN 2036.12 per month (average of urban/rural poverty and extreme poverty lines, as computed by CONEVAL for July 2020).
  - Support duration: 3 months.
- The estimated cost is contingent on:
  - The amount of monthly support.
  - Its duration.
  - The underlying assumption on the duration of the shock.
- With potentially substantially higher durations of non-employment and under-employment, the amount of support would be notably higher.
  - Example: Using the same underlying assumptions for computation, 6 months of support would amount to 0.3-

*Source: wpiea2020215-print-pdf - 1.2 percent of GDP.*

### 0.6 percent of GDP, while 12 months of support would amount to 0.7-1.2 percent of GDP.

### wpiea2020215-print-pdf - 0.6 percent of GDP, while 12 months of support would amount to 0.7-1.2 percent of GDP.

### Support to informal workers — scope, assumptions, and cost estimates
- Informality in Mexico’s labor market includes non-agricultural informal firms, self-employed agricultural firms, unpaid workers, non-salaried workers, and workers without access to social security health services (Alvarez and Ruane 2019). None of these workers has access to Mexican Social Security Institute (IMSS).
- Total workers: about 56 million; formal workers (using shares from Alvarez and Ruane 2019): about 23.5 million (around 21 million insured by IMSS).
- Using IMSS-insured workers across construction, trade, and services sectors:
  - Total number of formal workers in construction, trade, and services in 2019: 10.5 million.
  - Assumption: 58 percent of total employment across each sector are informal (Alvarez and Ruane 2019).
  - Implied informal workers (sectoral approximation): 14.6 million.10
  - Sector-specific lockdown parameter assumed: around 0.7 (around 70 percent of workers in these industries might need help).
  - Implied informal workers from these sectors requiring support: around 10 million.
- Support design example:
  - 3-month income support of MXN 2036.12 per month (average of urban/rural poverty and extreme poverty lines, as computed by CONEVAL for July 2020) to these 10 million informal workers.
  - Cost: MXN 61.6 billion, equivalent to 0.3 percent of GDP.
- Sensitivity and ranges:
  - Estimated cost range (varying lockdown assumptions and monthly support amounts) for targeted sectors: 0.1-0.5 percent of GDP (assuming 3 months of support).
  - Duration caveat: calculations assume 3 months of support; prolonged pandemic effects could require extensions and higher costs.
- Footnote/approximation note:
  - Using this sectoral approach for all sectors yields total employment across all sectors of 49 million, while actual data suggests employment of 56 million people; thus, this calculation could be regarded as a lower bound.

### Cost estimates of support to firms and credit rollover mitigation
- Estimate #1: Wage subsidies to formal workers of hard-hit sectors (construction, trade, and services):
  - Assumption: sector-specific lockdown assumptions and six months of 2036 pesos payments.
  - Required support: 0.4 percent of GDP.
  - Policy note: wage subsidies should be flexible and adjusted over time to mitigate unintended adverse consequences for labor market reallocation responses to the Covid-19 shock (Barrero, Bloom and Davis, 2020).
- Estimate #2: Banking sector credit to SMEs:
  - Banking sector credit to SMEs amounts to 11 percent of GDP.
  - Assuming average maturity of 3 years, about 1 percent of GDP of credit falls due each quarter.
  - Rollover risk mitigation: development banks directly extending loans (against collateral) for about 1-2 percent of GDP, or development banks sharing/backstopping credit risk with commercial banks to facilitate rollover.

### Cost estimate of accelerated/additional investment
- Authorities have already allocated 0.2 percent of GDP to social spending including public works, security and education in response to Covid-19.
- Proposal: increase to 0.4 percent of GDP, including investing in maintenance and restarting delayed projects, to recuperate a fraction of private investment lost.
- WEO projection context:
  - 2020 WEO projection for private fixed investment decreased from 17.7 percent of GDP (pre-Covid-19) to 16.5 percent of GDP in July 2020 (WEO) version, a decline of 1.2 percentage points.
  - Assuming a quarter of the lost investment could be replaced by public investment implies a cost estimate of around 0.4 percent of GDP.

### Medium-term fiscal reforms — overview
- Rationale: social spending is set to increase rapidly over time and other expenditure pressures are emerging; raising revenues from current exceptionally low levels is indispensable to finance social spending sustainably and create space for a more forceful near-term response to Covid-19.
- Goal of proposed reform package: deliver at least 3 percent of GDP in additional tax revenues, centered on improving VAT performance, rationalizing inefficient and regressive income tax expenditures, and widening the top personal income tax bracket.

### Increase tax capacity — VAT performance and recommendations
- VAT performance (2019):
  - Net of refunds, VAT reached 3.9 percent of GDP.
  - OECD average: 7.0 percent of GDP.
  - Latin America average: 7.3 percent of GDP.
  - VAT C-efficiency: 29 percent (one of the lowest among OECD and Latin America; Latin America average C-efficiency: 50 percent).
- Reasons for low VAT C-efficiency:
  - Narrow base due to tax expenditures on final products and zero ratings/exemptions (1.43 percent of GDP in 2019: 0.26+1.17 in Table 3).
  - Exclusions from the object of the tax (owing to informality).
  - High non-compliance: IMF (2018) estimated compliance gap of 45.8 percent of potential revenue in 2016 (or 2.41 percent of GDP).
- Policy recommendations to improve VAT:
  - Reduce policy gap:
    - “First-best” option: eliminate all domestic zero-rate items, except for a few key foodstuffs, and reduce exemptions.
    - Expected revenue boost: more than 1 percent of GDP from these actions alone.
    - Accompany with spending measures to address distributional concerns (through strengthened social safety nets); estimated cost to increase acceptability by strengthening social safety nets: about 0.5 percent of GDP.
    - International examples: Denmark, New Zealand, Chile and Estonia opted for broad-based VAT and redistributed additional revenue via well-targeted social safety nets.
  - Reduce compliance gap:
    - Adopt a comprehensive strategy in line with 2018 IMF technical assistance; potential revenue gains: 1 percent of GDP.
    - Measures include: improve SAT’s fragmented organizational structure, simplify the small taxpayer regime, move toward a high-coverage audit process for VAT returns, and strengthen sanctions against tax fraud.
  - Overall potential:
    - Fundamental VAT reforms to reduce policy and compliance gaps over the medium term could increase revenues by at least 2 percent of GDP (IMF 2018).
    - Raising VAT C-efficiency to Latin America average (50 percent) would increase revenue by more than 2 percent of GDP.
  - Political-economy caveats:
    - Revenue gains from strengthened compliance will take time to materialize; fiscal planning should be prudent and not ex ante count on large gains.
    - If “second-best” alternatives are pursued, aim for partial improvement that ultimately approaches the “first-best”; fully exempting all domestic zero-rated items simplifies administration but yields limited revenue and disproportionate leakage to the better off.

### Increase PIT revenues — scope and recommendations
- PIT performance and scope:
  - PIT revenues in Mexico are some 5 percent of GDP less than the OECD average.
  - Tax expenditures for PIT: close to 1 percent of GDP in 2019.
  - Authorities consider at least 0.5 percent of GDP of these tax expenditures are inefficient or regressive and could be rationalized (IMF 2019c).
  - Threshold for the top PIT bracket was increased by five percentage points as part of the 2014 reform and could be lowered to widen the base.
- Potential revenue gains from PIT reforms: about 0.5-1 percent of GDP.

### CIT and other taxes — limited scope and targeted opportunities
- CIT:
  - CIT rate: flat 30 percent.
  - CIT revenue: 3.6 percent of GDP.
  - OECD average CIT revenue: 2.8 percent of GDP.
  - Assessment: limited scope to increase CIT revenue through base broadening; further collection gains unlikely to match potential in VAT and PIT areas.
- Other taxes with scope to raise revenue:
  - Gasoline excise tax:
    - Current formula guarantees cumulative retail fuel price growth below CPI inflation since November 30, 2018.
    - Revoking this policy could provide some ¼ percent of GDP in additional revenues.
    - In a low oil price environment, there is scope to increase gasoline excises.
  - Subnational taxes:
    - Property taxation currently 1.5 percent of GDP less than the average of Latin American countries.
    - Reform aim: collect at least ¾ percent of GDP by closing the gap with peers, facilitated by a federal agency to update the cadaster and policy coordination to avoid fragmentation.
    - Complement with redesigned vehicle registration tax by simplification and stricter enforcement to enable reduction in transfers to states and municipalities.

### Raise public investment and health spending
- Medium-term public investment package:
  - Increase public investment by 1.5 percent of GDP, out of which a third is allocated to healthcare.
  - Public investment increase (excluding health): around 1 percent of GDP to bring public investment-to-GDP ratio back in line with historical averages and peers.
  - Context: investment spending declined from an average of 4 percent of GDP over 2008-2018 to 2½ percent in 2019.
- Health spending:
  - IMF (2019a) computes an increase in health spending of ½ percent of GDP is needed over the medium-term to make satisfactory progress towards the SDGs in health by 2030.
  - Costing follows input-output methodology of Gaspar and others (2019).
  - Note: spending to achieve SDG goals would be considerably larger if efficiency gains are not achieved; estimate is probably conservative given likely long-lasting effects of the Covid-19 shock.

### Strengthen social safety nets (SSN) and consider unemployment insurance
- Need and objectives:
  - Mexico lacks a nationwide unemployment benefits system; pandemic likely to have adverse impact on poverty and inequality for years.
  - Strengthen SSNs durably to protect the most vulnerable and increase acceptability of VAT reforms.
- Four desirable SSN attributes (Grosh and others 2008; IMF 2020b):
  - Broad coverage and adequate progressive benefits within overall tax-benefit system.
  - Cost effectiveness by avoiding program fragmentation and beneficiary overlaps.
  - Preservation of work incentives and enhancement of human capital via linking transfers to programs (public works, health care, education/training).
  - Financial sustainability within overall expenditure envelope and consistency with other social protection programs.
- Current SSN issues in Mexico:
  - Significant gaps in coverage of lower income groups and beneficiary incidence.
  - Programs are fragmented, involve beneficiary overlaps, and lack appropriate incentive features.
  - Large leakage of benefits to higher-income groups increases importance of better targeting and strengthening progressive income taxes to claw back benefits from high-income groups.
- Recommendations to improve SSNs:
  - Expand coverage in a cost-effective manner through proxy-means targeted transfers using statistical scoring to predict incomes/consumption/poverty.
  - Decrease duplications by strengthening administrative capacity and matching different databases to create a single registry.
  - Use instruments effective for reaching those in need, including in the informal sector: mobile money, in-kind transfers (education and health), and community-based identification methods.
  - Consider designing a nation-wide unemployment benefits system.

*Source: wpiea2020215-print-pdf (IMF).*

### 1. Coverage 2. Adequacy

### 1. Coverage 2. Adequacy

### Data and definitions
- Source: IMF FAD Social Protection & Labor - Assessment Tool (SPL-AT).
- Coverage: measures the percentage of the quintile that receives a SSN benefit.
- Adequacy of benefits: measures the total transfer amount received by all beneficiaries in the quintile as a percent of the pre-transfer total income/expenditure of beneficiaries (in that quintile).
- Calculations are based on pre-Covid-19 information.

### Targeting and incidence (figure notes)
- Benefits incidence: percentage of benefits going to each quintile of the pre-transfer welfare distribution relative to the total benefits going to the population.
- Beneficiary incidence: percentage of program beneficiaries in a quintile relative to the total number of beneficiaries in the population.
- Indicators estimated by program type and by quintiles of the pre-transfer welfare distribution.
- Calculations are based on pre-Covid-19 information.

### Composition of SSNs and poverty reduction (figure notes)
- Source for composition: ASPIRE (World Bank) and national authorities.
- Note: Apart from Mexico, which reports the size of its SSN in 2020, all other numbers are the latest available before the outbreak of Covid-19.
- Poverty reduction impact: simulated percentage change reduction in poverty gap owing to social safety net programs, computed as (poverty gap pre transfer - poverty gap post transfer) / poverty gap pre-transfer.
- Source for poverty simulation: IMF World Economic Outlook.

### IV. MACROECONOMIC IMPACT OF THE PROPOSED PACKAGE — overview
- Model: IMF’s Global Integrated Monetary and Fiscal (GIMF) model (multi-country structural dynamic general equilibrium model featuring Mexico).
- Purpose: illustrate macroeconomic effects of a “fiscal twist” strategy for Mexico.

### A. The “fiscal twist” package — first-year measures (emergency lifelines)
- Assumed first-year overall fiscal deficit increase: 2.5 percent of GDP to mitigate Covid-19 fallout.
- Expenditure increases (first year):
  - Government consumption: 0.5 percent of GDP (largely healthcare).
  - Government investment: 0.5 percent of GDP (out of which 0.1 percent of GDP is on healthcare).
  - Targeted social transfers: 1.2 percent of GDP.
- Revenue (first-year):
  - Wage subsidies reflected as decline in labor tax: 0.3 percent of GDP.

### A. The “fiscal twist” package — second year and medium term (fully anticipated)
- Second-year overall fiscal deficit increase: 1.0 percent of GDP (focused on recovery).
- Second-year expenditure:
  - Maintain higher public investment: 0.5 percent of GDP for healthcare (to progress toward SDGs in health).
  - Enhancing social safety nets: about 0.5 percent of GDP (support poverty-reduction efforts 0.2 percent of GDP; alleviate regressive VAT reform 0.3 percent of GDP).
- Revenue from proposed tax reform (from third year, structural increase): 2.0 percent of GDP composed of:
  - Broadening of the PIT base and increasing social security contributions: 0.5 percent of GDP.
  - Improving VAT performance: 1 percent of GDP.
  - Broadening of the CIT base: 0.2 percent of GDP.
  - Increasing property/local taxes: 0.3 percent of GDP.
- Additional public investment (third year): 1 percent of GDP.
- Assumption: medium-term tax reforms perceived as credible lower the risk premium by 50 basis points.

### Public investment efficiency scenario
- Scenario simulated where public investment efficiency is assumed to be 30 percent higher.
- Rationale: on average, more than one-third of funds for public infrastructure are estimated to be lost owing to inefficiencies worldwide.

### Table 4 / GIMF model inputs (values in percent of January 2020 WEO GDP)
- Government deficit (expenditure-revenue) by period t=1..6: 2.5, 1.0, 0.0, 0.0, 0.0, 0.0
- Total expenditure by t=1..6: 2.2, 1.0, 2.0, 2.0, 2.0, 2.0
  - Government consumption (t=1): 0.5
  - Government investment by t=1..6: 0.5, 0.5, 1.5, 1.5, 1.5, 1.5
  - Targeted transfers by t=1..6: 1.2, 0.5, 0.5, 0.5, 0.5, 0.5
- Total revenue by t=1..6: -0.3, 0.0, 2.0, 2.0, 2.0, 2.0
  - Labor tax (incl. social security contribution) by t=1..6: -0.3, 0.5, 0.5, 0.5, 0.5, 0.5
  - Consumption tax by t=3..6: 1, 1, 1, 1
  - Corporate Income tax by t=3..6: 0.2, 0.2, 0.2, 0.2
  - Property tax (lumpsum tax) by t=3..6: 0.3, 0.3, 0.3, 0.3
- Sovereign risk premium (basis point) by t=1..6: -50, -50, -50, -50, -50, -50
- Note: Health spending classified as part government consumption, part government investment.

### Box 2 — GIMF model key features and Mexico calibration
- Model regions: Mexico, the US, Japan, emerging Asia, euro area, rest of the world.
- Households: forward-looking optimizing (OLG Blanchard-Weil-Yaari) and liquidity-constrained households.
- Liquidity-constrained household shares: 50 percent for Mexico, Emerging Asia and the remaining countries; 25 percent for other regions.
- Mexico: Key calibration parameters (Percent)
  - Inflation: 3.0
  - Share of liquidity constrained households: 50
  - Government consumption/GDP: 15.7
  - Net acquisition of nonfinancial assets/GDP: 1.3
  - Private investment/GDP: 18.6
  - Government transfer/GDP: 5.4
  - Tax and SSCs revenue/GDP: 15.4
  - Labor tax incl. SSCs/GDP): 5.6
  - Consumption tax (% GDP): 5.8
  - CIT revenue (% GDP): 3.6
  - Property and other taxes/GDP: 0.5
  - Other revenue/GDP: 8.7
  - Gross public debt/GDP: 53.7

### B. Model results — expenditure measures only
- Expenditure measures expected to increase level of GDP by 1.2 percent in the first year, and by 2 percent over the medium-term.
- Increased demand expected to appreciate the real exchange rate and deteriorate the current account balance.
- Without revenue reforms, public debt would increase by 9 percentage points of GDP in the medium term.

### B. Model results — total package (expenditure + tax reforms + 50 bps risk premium decline)
- Combining expenditure measures with credible tax reform and risk premia reductions leads to:
  - Output gains and a stable public debt path (assuming no additional monetary accommodation).
  - Level of GDP higher relative to January 2020 WEO baseline in the first year due to larger emergency lifelines.
  - Output expected to continue to increase by about 3.6 percent in the long run (in eleven years).
  - Real exchange rate: appreciate in first few years, eventually depreciate as tax reforms are enacted.
  - Current account: deteriorate initially, then improve over the medium term.
  - Government deficit: increase in first year, then gradually decrease.

### B. Model results — with monetary accommodation and higher investment efficiency
- If monetary authorities remain accommodative (so long as inflation expectations anchored and demand shortages persist):
  - Medium-term output could increase by 3.2 percent.
  - Government deficit could fall 0.4 percentage points.
  - Government debt could fall by 2.2 percentage points.
- With public investment efficiency improved (30 percent higher):
  - Output improving by 4.1 percent over the medium term.
  - Government deficit falling by 0.6 percentage points.
  - Government debt declining by 3.5 percentage points.
- Conclusion: gains from improved composition of fiscal policy mix and the fiscal twist are sizable; coupled with structural reforms to improve productivity growth, overall benefits would be very significant over the medium term.

### V. Conclusion — policy implications and recommendations
- Immediate needs:
  - Contain the pandemic, mitigate economic effects, facilitate rapid recovery, and rebuild fiscal buffers over the medium term.
  - Near-term fiscal support estimated at around 2.5-3.5 percent of GDP required in health spending, social safety nets, wage subsidies, and public investment.
- Medium-term fiscal strategy:
  - Raise revenues from current low levels to sustainably finance rising social spending and higher public investment.
  - Propose a tax reform of at least 3 percent of GDP centered on improving VAT performance, rationalizing inefficient and regressive income tax expenditures, and widening the top personal income tax bracket.
  - Pair revenue mobilization with enhanced social safety nets.
- Simulated impact:
  - The proposed “fiscal twist” package would substantially increase output in the medium term and place public debt on a firm declining path compared to January 2020 WEO path.
  - Higher investment efficiency would further bolster these effects.
- Cross-policy considerations:
  - Supportive stances in monetary and other policies would be required for a durable economic recovery.

*Source: IMF FAD Social Protection & Labor - Assessment Tool (SPL-AT); IMF working paper content in the supplied PDF excerpt.*

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_Source: https://www.imf.org/-/media/files/publications/wp/2020/english/wpiea2020215-print-pdf.pdf_