Andrés Manuel López Obrador storms out as elections close

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ohn 5 February The outgoing president of Mexico, Andrés Manuel López Obrador, sent a package of 20 reforms to Congress. Most of them are ideas that have been rejected before, such as electing judges by popular vote and removing independent governors. The opposition will find one step more difficult to block in the run-up to the June elections: the president wants workers’ pensions to be equal to their final salary, up to a limit of 16,777 pesos ($984) every month.

Apparently he thinks this big bung for the relatively wealthy will win him votes. It only applies to workers with formal jobs – less than half the total. (The government also provides a “welfare pension” – a cash transfer – to everyone over 65.) The private pension fund to which formal workers and their employers contribute to pensions cannot exceed 100% of salary to pay Somehow the government would have to make up the difference.

That will be hard. The average pension replacement rate (combining public and private pensions) is in the OECD, a rich country club, 61% of the salary. Public spending on Mexican pensions has already increased from 18% of the budget in 2018 to 22% this year. Citibanamex, a bank, says that the measure would cost 1.5% of GDP a year by 2025, rising to 2% in a decade as Mexico ages.

Lately Mr. López Obrador has been willing to splash out, even if it hurts both Mexico and his successor. Take money transfers. By cutting down on administrative costs, it initially gave households more than before without raising the budget significantly. But in 2023 he increased the budget for them by 8% in real terms. The value of the welfare pension has more than tripled in real terms since 2018, to 6,000 pesos every two months.

Citibanamex describes Mexico’s budget for this year in detail as “a plan to win the elections”. Given Mexico’s history of fiscal irresponsibility, it is dangerous. The net debt toGDP The ratio is expected to rise this year from 46% to 48% and is more stressed than it was for much of the 2010s due to higher interest rates. The fiscal deficit will increase from 3.5% to 5% of GDP: rating agencies warn that the country could risk a credit downgrade. A “red flag” is being raised because this year part of the loan is going towards current consumption rather than investment, says Javier Aparicio from CIDEuniversity in Mexico City.

Mr López Obrador has long been seen as a peso-pincher, partly because of his campaign of “republican austerity” and partly because he spent less than 2% of GDP to support people during the pandemic. But he has not cut as much as he has restored the budget according to his republican priorities. It imposes costs on government machinery, eliminating the civil service. Too little is spent on health care and education. Mexico only emits 0.6% of it GDP year on domestic security, the lowest in Latin America and the Caribbean.

But the president is keeping the tab open for infrastructure projects, says Mr. Aparicio. They have spent billions of dollars. Just one, the Tren Maya, a tourist train in the southeast, will cost at least $28bn, up from the original budget of $7.5bn. He has also built Pemex, the state oil company. It has received at least $70bn since 2018 in transfers and tax breaks, says Vanessa Rubio, a former opposition senator now at the London School of Economics.

All of this will hamper the next president, even if Congress refuses to splurge on pensions. Claudia Sheinbaum, the candidate for Morena, the ruling party, seems poised to win. She and Xóchitl Gálvez, the candidate for the opposition coalition, say they will continue to pay for money transfers. Even if Mr. López Obrador’s mega-projects are completed before he leaves office, his successor will have to reallocate funds to neglected roads and ports.

Fiscal reform is becoming inevitable. Mexico’s annual tax take is only about 17% of GDP; in Chile it is 24%. Income taxes are already high, but the government could encourage workers to move from the informal sector to the formal sector, where they pay tax. Perhaps value-added and property taxes could raise more money. At the same time Pemex also needs to be reformed.

Mexico’s multidimensional poverty measure shows clearly where money should be spent, says Ms. Rubio. There are many elderly people in Mexico who need more help, but many of the younger ones do too.

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