This week has seen the beginning of discussions within legislative commissions over two reforms whose approval will have an important impact in Mexico’s competitiveness: the tax (discussed on the Chamber of Deputies) and the financial reforms (on the Senate). On one hand, one of the main objections against the initiative of tax reform of the federal government (already downgraded by several legislators and analysts as “fiscal miscellanea”) is that, instead of boosting economic growth – without whom it’s unsustainable to cover the costs of any social security system (however scarce it may be) like the one presented by the Executive Power – will aggravate the country’s economic recession because it reduces its competitiveness. How true is that argument? On the other hand, even when most analysis show that the tax reform has more benefits than disadvantages, it’s essential to review the challenges it implies, as well as to question whether the aforementioned modifications have the risk of being counterproductive for competitiveness, economic development and the financial system’s stability.
Several of the tax reform’s proposed modifications represent a major setback for the exports sector, one of the cornerstones of the country’s economic growth (low, but growth still). The manufacturing industry represents 82% of the country’s total exports but it has a growing gap with companies located in the north side of the border with higher salary costs, but a much better infrastructure, cheaper basic services (water, electricity, natural gas), less troubling paperwork and more fiscal incentives. The VAT homologation of the border zones with the rest of the country (from 11% to 16%), eliminating VAT’s deductibility of (temporary) imports from these export industries, eliminating deductibility of social security contributions, increasing income tax to 32% over the companies’ profits, as well as eliminating the accelerated depreciation for investments are some of the elements that will drastically reduce competitiveness in Mexico with the aim of capturing foreign investment and developing products that are attractive to export. In a few words, approving this reform could be the tipping point for a (worse) recession.
Regarding the package of legal modifications included in the tax reform, even though it has important transformation attempts (such as boosting credit via reducing interest rates, strengthening the National Commission for Protection and Defending Financial Service Users or Condusef, homologating the scandalous differences in banks for active and passive rates, among others), it is worth reviewing some potential obstacles in the process. For instance, one of the most worrying issues consists in determining incentives to generate a broadening in the credit supply, an essential part of boosting competitiveness. It should be highlighted that an irresponsible enthusiasm to reach that target could end up deteriorating the banks’ portfolios – starting with the development banks – instead of generating a bigger growth. Under these recession circumstances, and given the proposals of raising taxes that limit production activities, there is the risk that uncontrolled bank loans will derive in an unbalance of the system, just like it has happened in the past. Likewise, the proposal of modifying the pre-charge detention and delaying it on case of arrears could be the start of a Constitutional controversy due to violations of the 17th article (“nobody can be apprehended due to debts of purely civil character”), in addition to inhibiting financial inclusion (who in their right mind would want to live with the fear of going to prison by not paying his credit card on time?).
The observance of authorities and specialists in the face of potential adverse effects of these reforms is essential. Mexico should move forward… not backwards.
CIDAC
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