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

IMF Working Papers, October 13, 2020

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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 risks a more severe recession and a weaker economic recovery, with further costs in the future.
The paper lays out an alternative strategy that balances stronger near-term fiscal support for people and the recovery against medium-term fiscal discipline.
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.

A combined package of upfront medium-term fiscal reform plus larger short-term support:
- Boosts output.
- Limits lasting economic damage from the pandemic.
- Puts the debt trajectory on a declining path in the medium term as tax reforms materialize and risk premia decline.

Announce credibly a pro-growth and inclusive medium-term fiscal reform upfront.
Increase tax capacity through strengthened tax administration and reforms to tax instruments.
Raise public investment to support recovery and longer-run growth.
Strengthen social safety nets and social assistance spending to protect vulnerable populations.
Use the credible medium-term reform announcement to justify larger short-term fiscal support without compromising medium-term fiscal sustainability.

Subjects: COVID-19, Expenditure, Fiscal policy, Health, Health care spending, Public investment spending, Revenue administration, Social assistance spending
Keywords: cost reduction, Covid-19, expense estimate, fiscal response, GDP fall, general equilibrium model, general equilibrium model., Global, Health care spending, lumpsum tax, personal income, property tax, Social assistance spending, social safety nets, social security contribution deferral, tax, tax administration record, tax instrument, tax payment, WEO GDP, WP, zero rating