Marco Pérez Valtier: Public spending, pro-cyclical or anti-cyclical?

Marco Pérez ValtierMarco Pérez Valtier Source: Félix Vásquez

Although the fundamental work of the Government is to govern, which includes the elaboration of Laws and the delivery of Justice, in last week’s note commented that the government’s job is also to regulate economic activity, and through its different policies and instruments of intervention, it must try to “match” the playing field to the different economic actors, as well as promoting and encouraging the opening of new businesses, which are the ones that will ultimately generate the jobs and the wage bill that every economy requires to grow and develop.

However, the Government also has a powerful instrument to intervene in the national economy, which is the Public Expenditure, which is part of the Fiscal Policy, and that according to the textbook, an Anti-cyclical use is recommended to “cushion” the expansions and contractions of the economy.

That is, if the economy is in an expansion phase, growing a lot, moderation in Public Expenditure is recommended, so as not to overheat the economy, and generate higher growth in demand and possible shortages, while if it is in a recession, or in a phase of economic contraction, the recommendation is to increase public spending to help mitigate or stop the decreasing inertia of production, thus cushioning the fall in the economy.

However, an autonomous increase in public spending, not backed by the greater generation of own income, leads to a greater financial deficit, which in turn must be corrected with greater public debt, so the recommended counter-cyclical support of increasing spending in recessive times, must be carefully evaluated against financial risks of increased indebtedness.

Thus, once the close of the year 2020 has been reported for the finances of the federal public sector, the result that they present to us is that the Total Net Spending that was programmed for the year, (prior to the Pandemic) of $ 6,107.7 thousand of millions of pesos, fell short of $ 25.5 billion pesos, when reporting a Total Net Spending accrued of $ 6,082.2 billion pesos.

At first glance, everything indicates that the budget spending exercise was Pro-Cyclical, since it was lower than approved, despite the fact that the Mexican economy was in a strong economic contraction, and the recommended “recipe” was to increase public spending, to cushion this fall.

However, it is important to note that the entire “Sub-exercise” (and more) is attributable to PEMEX, since said State Productive Company has a lower budget exercise, in relation to the one approved in the Federation’s Expenditure Budget, of the order of $ 111 billion pesos, mainly due to the fall in the international price of oil, as well as well as non-compliance with the hydrocarbon extraction goal, which strongly impacted their expected income, and therefore, their spending.

In fact, if we review the evolution of the Federal Government’s Net Expenditure, what we find is that it does increase in relation to the expenditure approved by the Deputies, in particular Programmable Expenditure, since as a result of the fall in collection, and of the reduction in interest rates, the Non-Programmable Expenditure, within which the Participations to States and Municipalities and the debt service are recorded, was significantly reduced during the past year (less $ 114.2 billion pesos) which allowed the Federal Government to spend more in the item of Programmable Expense.

In effect, this item of expenditure increased by more than $ 160 billion pesos during the past year, which can be classified as Counter-Cyclical expenditure of the Federal Government, in accordance with the provisions of the traditional Fiscal Policy, although a good part of that higher expense ($ 52.4 billion) went to financial assets of the Development Banks, which were not necessarily used to reinforce consumption.

In fact, without considering the higher spending of the SHCP that was already mentioned, the second item with the greatest increase in spending approved by the Deputies was Health ($ 25.2 billion) for obvious reasons of the pandemic, while the first place was occupied by the extraordinary support channeled by the Ministry of Economy, whose budget increased by $ 34.8 billion, and was channeled mainly to the program of loans to the word.

The army It also increased its programmable spending by $ 24.3 billion, as it increasingly assumes greater spending attributions, and the works of the Felipe Ángeles airport in Santa Lucía are registered with this Secretariat.

The Secretary of Tourism It also increased its approved spending, by $ 8.7 billion, basically because the investments of the Mayan Train are being registered there, while the Ministry of Welfare, which manages the largest social programs, only increases its spending marginally, by less than one billion of pesos.

In abstractAlthough consolidated budgetary spending was pro-cyclical as it was reduced compared to what was approved for 2020, excluding PEMEX, public spending did support the recession in a counter-cyclical way, albeit marginally.

This is an opinion column. The expressions used here are the sole responsibility of the person signing them and do not necessarily reflect the editorial position of El Financiero.