Mexico needs fiscal reform before demographic pressure rises; Scotiabank proposes new federal pact

Scotiabank Mexico advocates for a fiscal reform, stressing the need for a federal pact that commits all three levels of government to better distribute responsibilities and resources. Such a pact, the bank argues, would incentivize economic growth through increased infrastructure and education spending. Eduardo Suárez, director of Economic Studies for Latin America at Scotiabank, stated that while it's always a good time for fiscal reform, delaying it will only make the process more difficult, especially as Mexico faces a demographic shift with its population pyramid expected to invert in 17 years. He noted that Mexico has not undergone a substantial fiscal reform since the changes to social security in 1997 and 2020, with previous adjustments focusing on tax collection rather than a comprehensive overhaul of the tax system, federal pact, and spending distribution to encourage private sector behavior. Suárez emphasized that a viable reform must stem from a federal pact, defining how state, municipal, and federal governments share revenue collection efforts. He pointed out that only a few local governments effectively collect property taxes, while others do not collect them at all. To learn from successful models, Scotiabank recommends studying the experiences of Poland and Ireland. The bank also highlighted the inertia in public spending and the impending demographic changes as critical factors. Suárez differentiated between minor fiscal adjustments for the upcoming year and a true tax reform, which requires a fundamental rethinking of the tax system's logic. Regarding the USMCA (T-MEC), Suárez expressed optimism about its continuation, despite the complex bilateral relationship, positioning North America as a strategic economic and commercial powerhouse for decades to come. He anticipates Mexico and Canada will seek guarantees against future tariffs, similar to those imposed under Sections 233 and 301. Scotiabank advises patience and negotiation to achieve the best possible agreement. Additionally, the bank stressed the importance of improving public policies and combating corruption and insecurity, which, while not directly impacting trade relations, require attention.