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The following excerpt summarises Chapter 6 of Challenges to Fiscal Adjustment in Latin America: The Cases of Argentina, Brazil, Chile and Mexico by Rogelio Arellano Cadena (Bank of Mexico) and Fausto Hernandez Trillo (CIDE), published on 22 February 2006.
Mexico posted large budget deficits during the 1970s and early 1980s, reaching 16% of GDP in 1982, the highest in recent history. When the Debt crisis erupted in 1982, macroeconomic adjustment was achieved through the implementation of an orthodox programme at first, followed by some heterodoxy, as an economic pact was reached to control prices in all sectors. These adjustment programmes included strong fiscal consolidation. Since then, Mexico’s fiscal policy has been conducted in a prudent manner, including after the Tequila crisis of 1994, when the value added tax (VAT) rate was raised from 10 to 15%. Fiscal discipline has been accompanied by responsible monetary policymaking since 1993, when the central bank was granted formal independence. The Mexican authorities have been relatively effective at containing the growth of expenditure in support of fiscal consolidation, but, as we show in this chapter, reliance on oil revenue may pose some pressure to aggregate demand, which in turn affects inflation.
There are important challenges in the fiscal area, including the need to ensure fiscal sustainability over the medium-to-longer term, to raise tax collection, including by reducing reliance on oil revenue (the “Fiscal Dutch Disease”), and to pursue structural and microeconomic reform. This chapter addresses these three challenges.
Composition of revenue, 1990-2002
In per cent
Source: Ministry of Finance.
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