Mexico | Economic recovery by reducing the income tax rate for low-income taxpayers

  • Despite the reduced fiscal space, we consider it desirable to boost private consumption and, by the same token, aggregate demand by reducing the target for the 2019 primary balance to 0.5% of GDP
  • We suggest that this be implemented through a reduction in the income tax rate in such a way that it benefits taxpayers at low-income levels, which have a higher marginal propensity to consume
  • To avoid that such fiscal stimulus brings about a permanent reduction in the tax revenue derived from income taxes, we suggest public policies aimed at lowering the informal sector’s size and thus make it possible to have a significantly broader base of taxpayers in the years to come

We believe that the economic recovery plan announced by the Ministry of Finance several weeks ago will have a positive marginal impact on economic growth in 2019. This is mainly the case because 66% of the plan's resources are allocated to the provision of loans and guarantees of development banks. Although the plan aims to boost the productive activity of micro-businesses and small and medium-sized enterprises, the full amount of credit granted will depend on these companies' demand for credit and, ultimately, on the demand for the goods and services they produce.

As we estimate there is a low probability that commercial banks apply credit rationing to those companies and in our view the relatively low banking penetration is due to demand and not to supply problems, we believe that there would be relatively low demand for such credits unless credit risk admission standards were relaxed. The latter would result in financial losses for development banks and, in the case where their equity would fall below the minimum level, public finances would be under pressure.

In our view, it would be more effective that the fiscal stimuli package be concentrated on the development of infrastructure projects. This is mainly due to their higher impact on potential economic growth because of the positive externalities that they could produce. For such type of package, we propose the creation of an autonomous institution that oversees the financial and social valuation of public investment projects. Consequently, the risk of approving such projects only because of political considerations would be mitigated. Given that Mexico does not have an institution of this nature, the fiscal stimulus that we will describe next will revolve around paying lower taxes.

As we know, economic growth in Mexico is experiencing a slowdown that has been reflected on the stagnation of productive activity since the fourth quarter of last year. Moreover, the pace at which formal employment is created has been in significant decline from an average annual growth rate of 3.5% in the fourth quarter of 2018 to 2.4% in the second quarter of this year. In the meantime, the figures for the annual variation of the private consumption indicator in the domestic market were 1.4% for the fourth quarter of last year and 0.8% for the months of April and May. Finally, GDP showed an annual growth of 0.3% in the first half of the year. Our annual GDP growth forecast for 2019 is 0.7%.

Download The Full Economic Indicators

En ningún caso BBVA será responsable de las pérdidas, daños o perjuicios de cualquier tipo que surjan por acceder y usar el website, incluyéndose, pero no limitándose, a los producidos en los sistemas informáticos o los provocados por la introducción de virus y/o ataques informáticos. BBVA tampoco será responsable de los daños que pudieran sufrir los usuarios por un uso inadecuado de este website y, en modo alguno, de las caídas, interrupciones, ausencia o defecto en las telecomunicaciones.

Analysis feed

Latest Forex Analysis

Editors’ Picks

EUR/USD: bears pressuring, 1.0980 critical support

Risk aversion took over the FX board on Friday, weighing on high-yielding assets. The EUR/USD pair, finished the week just a handful of pips above the 1.1000 figure amid mounting tensions between the US and China.


GBP/USD: at risk of losing more ground in the short-term

The GBP/USD pair advanced up to 1.2581, it highest in over two months, but was unable to sustain gains, ending the week around 1.2470. Cable could keep losing ground on a break below 1.2460, the immediate support.


USD/JPY: at a bring of breaking lower

Fresh risk-off flows resulted in the USD/JPY pair trimming weekly gains on Friday, ending the week at 107.55. The pair barely holding above a critical Fibonacci support at 107.45. Japan’s National inflation steady at lows in August.


Top 3 price prediction Bitcoin, Ripple, Ethereum: Ethereum points to the Moon as Bitcoin takes a break

ETH/USD exceeds $220 and is bidding to lead the market. Bitcoin sets a bear trap and recaptures $10,000. XRP stalls between technical levels and fails to consolidate $0.30.

Read more

Gold climbs further beyond $1500 mark, lacks follow-through

Gold edged higher for the second consecutive session on Friday, albeit remained well within a familiar trading range held over the past two weeks or so.

Gold News

Forex Majors