Mexico Needs a Fiscal Twist: Response to Covid-19 and Beyond

By Swarnali A Hannan, Keiko Honjo, Mehdi Raissi

October 13, 2020

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Swarnali A Hannan, Keiko Honjo, and Mehdi Raissi. Mexico Needs a Fiscal Twist: Response to Covid-19 and Beyond, (USA: International Monetary Fund, 2020) accessed October 26, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Mexico’s fiscal response to the pandemic has been modest compared to its peers, reflecting the authorities’ desire to not issue new debt for spending. This approach, however, risks a more severe recession and a weaker economic recovery, with further costs in the future. Balancing the need for stronger near-term fiscal support for the people and the recovery against medium-term discipline, this paper lays out an alternative strategy. We show that credibly announcing a pro-growth and inclusive medium-term fiscal reform upfront—including increased tax capacity, higher public investment and strengthened social safety nets—would open space for larger short-term support and close medium-term fiscal gaps. Model simulations suggest that this package would boost output, limit lasting economic damage from the pandemic, and put debt trajectory on a declining path in the medium term as tax reforms pay off and risk premia decline.

Subject: COVID-19, Expenditure, Fiscal policy, Health, Health care spending, Public investment spending, Revenue administration, Social assistance spending

Keywords: Cost reduction, Covid-19, Expense estimate, Fiscal response, GDP fall, General equilibrium model, General equilibrium model., Global, Health care spending, Lumpsum tax, Personal income, Property tax, Social assistance spending, Social safety nets, Social security contribution deferral, Tax, Tax administration record, Tax instrument, Tax payment, WEO GDP, WP, Zero rating

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/215
Stock No:

WPIEA2020215
ISBN:

9781513559018
ISSN:

1018-5941

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