Is Mexico taking a wrong turn? How to pay for its Universal Coverage Proposal

 Is Mexico taking a wrong turn? How to pay for its Universal Coverage Proposal

-Heidi Jane M. Smith, PhD

Recent international coverage of Mexican news has not incorporated one of the most important new political contests of its future. News of drug violence, fraudulent elections, money laundering, and even cheating the national lottery has covered the news in the past few weeks. But what most Mexican may fear is how to pay for the proposed plans of the incoming government.

We all know about the election results, the populist puppet candidate with little to no platform, unable to talk off cue, but what is less known and not in the press is the current discussions regarding the upcoming fiscal reforms that the PRI will try to ram through congress during the PAN’s lame duck session this fall. 

What is most likely to occur is the approval of universal social security coverage for every Mexican citizen plan developed by Santiago Levy, the current vice president for Sector and Knowledge at the Inter-American Development Bank (IDB) and former general director at the Mexican Social Security Institute (IMSS).[1] Thus ending the informality of the disenfranchised, which for many are able to find work, but receive no official benefits from the government. A Rooseveltian idea of widening government intervention and providing its helping hand to include every citizen as a beneficiary of the state; this idea is not novel but necessary to progress Mexico forward further into a middle income country where the state serves to protect the hungry, sick and poor.

The very admirable proposal, highly technical, which has been elaborated by the Levy since he left IMSS in 2005 and developed in his book “Good Intentions, Bad Outcomes,” provides the backdrop for a new revolution of Mexican fiscal affairs.[2] After all, Levy is the godfather of Progresa-Oportunitidades,[3] the transformative social program that linked welfare benefits with positive social outcomes (such as doctors visits and children’s school attendance) which has been replicated not only in Mexico but also across Latin America, even to beneficiaries in New York City.

Because the proposal includes such a massive transformation of informality, the first obvious question is who will pay for the new formal sector especially as Mexico’s central government’s social spending has increased, while tax collections have stayed the same overtime. (insert numbers on social spending?)

What’s more, Mexico has a dismal tax collection rate at less than 10 percent of GDP, which is just above Haiti as the second lowest collector of pubic funds within the Hemisphere. (see graph)

Mexico, along with Venezuela and Ecuador, are often cited as a rentier states with its heavy reliance on PEMEX, the national petroleum company to manage its public affairs. Even as the president-elect Enrique Pena Nieto’s policy advisors have included proposals to privatize external entities of the company (sale of natural gas and other such operations), which in this commentator’s position will require a heavy handed political machine and perhaps even a former finance minister from a traditional PRI family, to be able to revert the constitutional claim to (Article?) of Petroleos Mexicanos. 

Underlying in Levy’s proposal is a small but true fact; it would cost the state 3 percent GDP yearly for the hopeful universal coverage of the Mexican worker. 

With the current estimated growth rate at 1.5 percent (outpacing Brazil and even the United States) is expected to continue through the Pena Nieto government with a semblance of outgoing President Calderon’s fiscal policies. Although the current proposal includes tax reforms ideas from the 2008 debate, which PRI congressional representation suggested increasing the Value Added Tax (VAT) from 15 to 17 percent. The current rate is 16.

Now a radical increase of 21 percent VAT, per the proposed plan, is only a downward slide of regressive politics. On one side the proposal is providing benefits to the poor and disenfranchised, but on the other side requires double or triple costs for food and medicines or the basic necessities in which people need to live. 

The end result is much more horrifying. With a high VAT and low revenue collections apart from the collection of Pemex’s mega-monopoly could become a colossal mistake and potential end of Mexico’s new democratic state. Not only, will this proposal create a fragile economic balance between spending and revenues. Worse is the possible increase in the centralization of fiscal decisions making by the one party, which was in office for 70 years. 

With a past history of el dedazo and impunity, killing opposition leaders at bay, the proposal will insure the PRI more control and power to make economic decisions. For example, without equivalent growth to pay for its novel plan, may create unintended consequences as the party looks to find alternative ways to encourage revenues, and thus further tax the very people which it intended to help. The continued instrumentalism will drive the bus and not encourage overarching reforms necessary for true economic development.

As Franklin D. Roosevelt stated, “not only our future economic soundness but the very soundness of our democratic institutions depends on the determination of our government to give employment to idle men.” But what happens with no revenue are available to pay for these new jobs and the quick or snap ability by the executive to destroy the state with regressive increases in taxes and without diversity tax base in which to pay for these benefits?

An alternative more muddled approach to pay for Levy’s plan is to increase property taxes, simplify the business codes and continue to regulate and disband the mega-monopolies of Televisa and Telcel, just to name a few options. Without a balance of regulation and increase taxes to the very rich, the universal coverage idea is doomed to lead Mexico unto a rock road in the future.

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[1] Anton, Arturo, Fausto Hernandez and Santiago Levy. The End of Informality in Mexico? Fiscal Reform for Universal Social Insurance. Inter-American Development Bank Policy Paper, 2012.

[2] Levy, Santiago. Good Intentions, Bad Outcomes: Social Policy, Informality and Economic Growth in Mexico, Brookings Institution Press, 2008.

[3] From 1994 to 2000, Levy served as the Deputy Minister at the Ministry of Finance and Public Credit of Mexico where he developed the idea for the social program.