Austerity in Mexico: Economic Impacts and Unpleasant Choices Ahead

Mexico has a long history of dealing with austerity as a tool to achieve fiscal consolidation. During the last 40 years, the country has repeatedly implemented programs for austerity and consolidation aimed at reducing fiscal imbalances, derived, in part, from acute macroeconomic crises. Since the late eighties, it has followed a more prudent approach to managing public finances and has avoided large deficits. However, the current outlook on Mexico's fiscal performance is complicated. Mounting pressures to raise expenditure, along with major changes in its composition, and structural fragilities in fiscal revenues, have resulted in eight years of public deficits and increasing debt. Further complicating this situation, in recent years, public finances have been significantly affected by adverse external shocks in the oil market. Not surprisingly, questions are emerging about the extent to which austerity will mark the current efforts to consolidate the fiscal accounts and whether it will lead them to a sustainable trajectory. This article starts with a brief discussion around the definition of austerity and fiscal consolidation. It then puts forward a historical analysis of the fiscal austerity episodes that Mexico has experienced during the last four decades. Subsequently it identifies the effects that public spending cuts have had on investment and economic growth in Mexico. Next, it analyses the evolution of Mexico's public finances, and how the successful attempt to implement a countercyclical policy in 2008-09 was short lived as fiscal policy soon became expansionary. Finally, it explores the expenditure pressures and the unpleasant choices on fiscal matters that Mexico will very soon have to make, as resources will most likely be insufficient to meet urgent investment requirements and pressing social spending needs.