Mexico Needs a Fiscal Twist: Response to Covid-19 and Beyond

Author/Editor:

Swarnali A Hannan ; Keiko Honjo ; Mehdi Raissi

Publication Date:

October 13, 2020

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

Mexico’s fiscal response to the pandemic has been modest compared to its peers, reflecting the authorities’ desire to not issue new debt for spending. This approach, however, risks a more severe recession and a weaker economic recovery, with further costs in the future. Balancing the need for stronger near-term fiscal support for the people and the recovery against medium-term discipline, this paper lays out an alternative strategy. We show that credibly announcing a pro-growth and inclusive medium-term fiscal reform upfront—including increased tax capacity, higher public investment and strengthened social safety nets—would open space for larger short-term support and close medium-term fiscal gaps. Model simulations suggest that this package would boost output, limit lasting economic damage from the pandemic, and put debt trajectory on a declining path in the medium term as tax reforms pay off and risk premia decline.

Series:

Working Paper No. 20/215

Frequency:

regular

English

Publication Date:

October 13, 2020

ISBN/ISSN:

9781513559018/1018-5941

Stock No:

WPIEA2020215

Format:

Paper

Pages:

33

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