Analysis: Mexico seen diluting tax reform to avoid Colombia-style discontent


FILE PHOTO: Demonstrators take to the streets during a protest of feminist collectives against the police and the excess of public force used to disperse peaceful protests, in downtown Mexico City, Mexico, May 29, 2021. REUTERS/Mahe Elipe/File Photo

MEXICO CITY (Reuters) - Mexico's government, in an effort to protect the country's nascent economic recovery and avoid the type of violent unrest seen in Colombia, has softened a planned tax reform, just as a recent electoral setback seems to confirm the need for caution.

Mexico's finance ministry has for several months floated a shake up of the tax structure of the country with the lowest fiscal take in the Organisation for Economic Co-operation and Development (OECD) group of industrial nations.

A fiscal conservative, President Andres Manuel Lopez Obrador promised no new taxes or hikes for the first three years of his six-year term, with that deadline expiring in December.

The International Monetary Fund (IMF) last year urged Lopez Obrador to enact tax reform once the country recovered from the COVID-19 pandemic to boost the economy and support spending in the medium-term.

Some in the ruling party had proposed wealth and inheritance taxes. Now though, circumstances have changed.

"We're coming out of the worst crisis of the last 90 years, not just in terms of the economy, but health," Deputy Finance Minister Gabriel Yorio told Reuters in an interview on Tuesday.

He said it was "a very bad time to burden taxpayers and the economy, especially in this recovery phase," with tax hikes.

Mexico's economy contracted 8.5% in 2020 due to the pandemic, the most since the Great Depression of the 1930s, and hundreds of thousands of jobs were lost, though employment and activity are clawing back ground, lifted by U.S. demand.

Lopez Obrador will take heed of the "cautionary tale" in Colombia, said UBS economist Rafael de la Fuente, after a planned tax reform there sparked weeks of deadly protests and led to the resignation of the nation's finance minister.

Yorio appeared to agree.

"The lesson learned from what happened in Colombia ... Coming out of a pandemic it's really difficult to promote these types of actions that will hurt the economy" and people, said Yorio.

He said Mexico's government does not plan to implement increases in an upcoming fiscal reform, and will instead focus on closing loopholes, improving taxing efficiency and expanding the taxable base. He said the goal was to raise the tax-to-GDP ratio to 15% from a current level of just above 14%.

ELECTION SETBACK

The loss of some political power after the results of Sunday's midterm elections in which Lopez Obrador's ruling National Regeneration Movement (MORENA) party and allies lost their two-thirds majority in the lower house of Congress could also prompt the president to negotiate more.

"A fiscal reform is always politically costly, and (the election result) means we will possibly see a less ambitious reform," said Adrian de la Garza, chief economist and head of economic research at Citibanamex.

Some of the more ambitious ideas floated, such as an inheritance or wealth tax, could disappear because leading proponent, MORENA lawmaker Alfonso Ramirez Cuellar, lost at the ballot box in his re-election bid, said De la Garza.

And even though Lopez Obrador's administration and allies have the majority needed to pass fiscal reforms, which only requires 50% plus one vote in both houses of Congress, his inclination for austerity, even during the pandemic when increased spending was needed, is another factor steering him away from a wide-ranging reform.

Lopez Obrador on Wednesday nominated current Finance Minister Arturo Herrera to the head the central bank and named an old ally to run the ministry. The changes are not expected to alter the president's preferred approach of finding funds by cutting the cost of government rather than raising debt or new taxes.

"Tax increases are not being considered," and they are not needed at this time in Mexico, Yorio said.

(Reporting by Anthony Esposito and Abraham Gonzalez; Editing by Aurora Ellis)

Article type: metered
User Type: anonymous web
User Status:
Campaign ID: 46
Cxense type: free
User access status: 3
Join our Telegram channel to get our Evening Alerts and breaking news highlights
   

Next In World

Far from home? Spider-Man drops in at the papal audience
Torrent websites blocked? This ‘vigilante’ malware stops users from visiting piracy-linked sites
PTV says sabotage attempt on Iran atomic energy organization building foiled
Blast kills two people, wounds 14 in eastern Pakistan - police
Russia says to boost military ties with Myanmar as junta leader visits
Sydney isolated as COVID-19 clusters build; NZ tightens curbs in capital
Russian security chief says Moscow will cooperate with U.S. against hackers - report
Britain's 'secret parliament' celebrates its 80th birthday
Nepal's top court removes most of cabinet in blow to caretaker PM
Afghan hospital burns after attack; Taliban seize border post in north

Stories You'll Enjoy


Vouchers