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

34 Pages Posted: 8 Dec 2020

See all articles by Swarnali Ahmed Hannan

Swarnali Ahmed Hannan

International Monetary Fund (IMF)

Keiko Honjo

International Monetary Fund (IMF)

Mehdi Raissi

International Monetary Fund (IMF) - Fiscal Affairs Department

Date Written: October 1, 2020

Abstract

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.

JEL Classification: H53, E62, H20, H51, H54

Suggested Citation

Ahmed Hannan, Swarnali and Honjo, Keiko and Raissi, Mehdi, Mexico Needs a Fiscal Twist: Response to COVID-19 and Beyond (October 1, 2020). IMF Working Paper No. 2020/215, Available at SSRN: https://ssrn.com/abstract=3744682

Swarnali Ahmed Hannan (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Keiko Honjo

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Mehdi Raissi

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

HOME PAGE: http://https://sites.google.com/site/mehdiraissi/

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