Ramírez de la O on the Fiscal Shock

This is from last week, but still interesting:

The crisis was a shock for the government, a negative surprise. But why, if many of us already knew about it?

First of all, all of the budget plans and, still more, their execution, were always surrounded by a baseless optimism. Its only support were the high oil prices. State governments were infected by this illusion and spent their federal money without building permanent wealth or investing in education, science, or public works.

At the end of last year the government expected a gross domestic product of 13.1 trillion pesos in 2009. With the decline, which took it by surprise, it will be about 15 percent less, and as the budget was based on the first figure, it made a myth out of it. Furthermore, there is no way to compensate what has been lost with more taxes in 2010, especially if the attempt is to collect from those who have lost the most consumptive capacity, the middle class.

One problem is that the majority of the expenses fed the federal government scheme of not investing, but rather maintaining PAN and opposition governors content and therefore buying their support. Today you can complain that the governors have "spent the bonanza", but it must be remembered that it was the executive himself that told them on repeated occasions that together they were going to share more income.

The true exit to this shock turned crisis is not within reach of the government nor Congress. Inertia dominates them both. To start, public expenses will have to be cut by 500 billion pesos for there not to be a deficit.

Or government revenue could increase by this amount.

[Break]

The real solution should be to recalibrate the size of the bureaucracy. Without that there will never be the funds to invest. But doing that requires the best possible political leadership, because it involves states, cities, Congress, and the judicial branch. Only after that can you begin to discuss more taxes and from whom to collect them.

Because that leadership is absent, the "solution" after weeks of discussions in Congress and between public and private bodies, will be the false exit. The only thing they are going to achieve with an investment freeze is sinking the economy even more, which will in turn punish revenue collection even more in the coming years and defund any budget that is made...

As Noel Maurer pointed out recently, it's odd how Mexican analysts are very debt-phobic, when borrowing to offset a crisis is standard practice in the US. Ramírez de la O is one of Mexico's most prominent liberal economic voices (he was AMLO's principal economic advisor in the 2006 campaign), and he comes off as something of a fiscal hawk here. I tend to think the discomfort with debt to Mexico's checkered history with borrowing, but maybe there's more to it than that.