Redistributive Impact and Efficiency of Mexico's Fiscal System

John Scott,CIDE

Policy Context• Over the last two decades a series of policy reforms have contributed to

increase the redistributive impact of social spending: – reallocation of public spending to social programs (from 25% of primary spending in the

1980s to 49% in the 2000s), – introduction of innovative and effectively targeted transfer programs, including the

Progresa/Oportunidades CCT, and – a general reorientation of basic education services, health services for the uninsured and

food subsidies from urban to poor rural areas.

• A second wave of reforms over the last decade increased public spending on non-contributive social protection programs benefiting the poor (though with the collateral effect of subsidizing informality), including basic pension programs (Adultos Mayores, 70 y más) and health insurance (Seguro Popular ). The most progressive spending categories at present include most direct transfers and food programs, pre-school and primary education services, and health services for the uninsured

Results• However, the redistributive impact of Mexico's fiscal system still falls well

below the country's redistributive potential as measured by its per capita income level, the quality (and redistributive effectiveness) of its best social programs, and the achievements of comparable countries in the region.

• Mexico's per capita income is similar to Argentina's and higher than Brazil's, but social spending as a share of GDP (10%) is less than half of Argentina's and 60% of Brazil's. The redistributive effectiveness of this spending in Mexico (1.39) is lower than Argentina (2.12) and similar to Brazil (1.37): the redistributive impact of social spending in Mexico (14.4%) is 10 and 6 percentage points lower than Argentina's and Brazil's, respectively.

Results• Mexico's direct transfer programs are just as effective in reducing extreme

poverty (2.5 USD PPP) as Argentina's, and more than twice as effective as Brazil's. However, Mexico spends only 1% of GDP on such transfers, while Argentina and Brazil spend 3.7% and 4.2%, respectively, so while these transfers reduce extreme poverty by 58% and 28.5% in the latter countries, they do so by only 15% in Mexico.

• The failure of Mexico's fiscal system to achieve its redistributive potential is explained by three principal characteristics of this system: – a progressive but unproductive tax system (non-oil tax revenues: 11.6% of GDP in 2010), – low spending on direct transfers, and – a significant share of fiscal resources allocated to instruments with limited redistributive

effectiveness, including energy subsidies and subsidies to contributive social security.

Results• A wide range of concentration coefficients across as well as within the

principal policy dimensions analyzed (education, health, social security, income support, food programs) reveals significant opportunities to improve the system's overall redistributive impact.

• The persistence of ineffective redistributive instruments absorbing large shares of fiscal resources may be explained by two principal factors: – capture of benefits by organized interest groups (agricultural subsidies, social

security subsidies for public sector workers). – economic costs to access public benefits in a context of high (market) income

inequality: explicit or implicit user fees, social security contributions, labor opportunity costs of attending public higher education, purchasing power for subsidized goods and services. Population dispersion acts as a third barrier contributing to both income and fiscal inequality.

Table 2

Redistributive Effects and Effectiveness of the Fiscal System:

Gini Coefficient and Extreme Poverty Headcount Index

Gini

Poverty Headcount Index

2.5 USD PPP LBM

2008 2010 2008 2010 2010

Nat. Nat. Urban Rural Nat. Nat. Urban Rural Nat.

Urban Rural

Market income0.529

3 0.51070.480

60.519

7 12.2% 12.6% 5.6% 35.6% 18.3%12.9%

36.1%

Net Mkt Income

0.5171 0.4975

0.4666

0.5123 12.4% 12.6% 5.7% 35.8% 18.4%

13.0%

36.2%

Disposable Income

0.5094 0.4876

0.4622

0.4810 10.8% 10.7% 4.8% 30.2% 16.4%

12.0%

30.9%

Post-fiscal Income

0.5002 0.4809

0.4590

0.4761 10.2% 10.7% 4.8% 30.1% 16.9%

12.6%

30.9%

Final Income0.448

1 0.42940.414

90.393

0-.- -.-

         

Change with respect to Market Income  Net Mkt Income -2.3% -2.6% -2.9% -1.4% 1.4% 0.6% 1.2% 0.3% 0.5% 0.9% 0.1%

Disposable Income -3.8% -4.5% -3.8% -7.4%

-11.2%

-14.9%

-14.6%

-15.1%

-10.3%

-6.8%

-14.5%

Post-fiscal Income -5.5% -5.8% -4.5% -8.4%

-16.2%

-15.1%

-14.5%

-15.5% -7.8%

-2.2%

-14.3%

Final Income-

15.3% -15.9%-

13.7%-

24.4%              

Effectivenessa  Direct transfers 1.99 2.05     16.67 16.04     11.23    

Total transfers 1.42 1.39     -.- -.-          Source: Author's estimates using data from ENIGH 2008, 2010, and Cuenta Pública 2008, 2010. a. Effectiveness is defined as the change in net market Gini associated with transfer divided by transfer share in GDP.

Oportunidades (CCT)Temporary Employment (PET)

Health IMSS-OportunidadesDiconsa (food subsidy)

Pension NC (estados)Health Seguro Popular

Health SSA (excl. SP)Total Direct Transfers

School breakfastFood Program (PAL)

Primary eduPreeschool edu

Smaller social programsPension NC (70 y más)

Procampo (agric. Subsidy)Lower secondary edu

Liconsa (targeted milk subsidy)Total social transfers CEQ

Total Transfers in kindUpper secondary edu

Scholarships (excl. Oport.)Electricity subsidy

Child care SEDESOLGas LP subsidies

Pension income (sensitivity ordering)Health IMSS

Negative ISR (Employment Subs)Tertiary edu

Petrol subsidies (IEPS petrol negative)Pension subs. (IMSS Active)

Pension NC (DF)Pension subs. (IMSS Pensioners)

Gini market incomeHealth PEMEXHealth ISSSTE

Child care IMSSPension subs. (ISSSTE)

Pemex PensionersFiscal spending private schools

Pension income (benchmark ordering)

-0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80-0.54

-0.48

-0.45

-0.39

-0.34

-0.34

-0.32

-0.30

-0.28

-0.26

-0.25

-0.24

-0.23

-0.22

-0.21

-0.16

-0.09

-0.06

-0.03

0.02

0.12

0.19

0.21

0.25

0.26

0.27

0.29

0.32

0.33

0.40

0.45

0.45

0.51

0.51

0.51

0.52

0.64

0.68

0.68

0.70

-0.21

-0.27

-0.20

-0.10

-0.18

-0.13

-0.10

-0.11

-0.12

0.06

-0.16

-0.15

-0.24

0.04

0.12

-0.09

0.03

-0.05

-0.03

0.09

0.11

0.20

0.35

0.32

0.46

0.56

0.40

0.37

0.58

0.24

0.64

0.52

0.76

0.70

0.72

0.74

Rural Urban

National

*Procampo, 70 y Más, programas estatales y DF de Adultos Mayores, PET, Becas escolares, PAL, Liconsa, Diconsa, Desayunos Escolares y otros programes sociales menores.

1 2 3 4 5 6 7 8 9 10 0

500

1000

1500

2000

2500

3000

3500

4000

Oportunidades Otras transferencias directas*Seguro Popular

The distribution of direct transfers and non-contributive social security benefits is pro-poor…

1 2 3 4 5 6 7 8 9 10 0

2000

4000

6000

8000

10000

12000

14000

16000

Oportunidades Otras transferencias directas*Seguro Popular Subsidio al Salario (ISR negativo)Subsidios SS Contributiva Pensiones Subsidios SS Contributiva SaludSubsidios Energéticos (subs. Gasolinas 2012)

…but these transfers are dwarfed by energy subsidies and subsidies to contributory social security

concentrated on higher income households through

Table 3Incidence of Taxes, Monetary and In-kind Transfers, and Indirect Subsidies by

Decile Nationally (with Respect to Market Income): 2010

DecilesNet benefits Taxes Benefits

Total Monetarya Total Directb Indirectc,d Indirect

SubsidiesDirect

TransfersIn-kind

Transfers

Benchmark :

informal consum

ption

1 137.9 32.1 -6.4 -0.1 -6.3 7.2 31.4 105.82 54.0 8.1 -5.1 -0.4 -4.8 4.6 8.6 45.93 35.3 2.6 -6.1 -0.7 -5.4 3.6 5.1 32.84 25.1 0.0 -6.3 -0.8 -5.4 3.4 2.8 25.15 17.5 -2.8 -7.8 -1.6 -6.2 3.0 1.9 20.36 12.1 -4.2 -8.2 -2.1 -6.1 2.7 1.3 16.37 6.5 -5.7 -8.9 -2.9 -6 2.4 0.9 12.28 1.6 -7.5 -10.3 -4 -6.3 2.2 0.6 9.09 -3.2 -9.4 -11.6 -5.4 -6.2 1.7 0.4 6.3

10 -10.5 -12.7 -14 -7.9 -6 1.0 0.2 2.2

 All 3.1 -7.7 -11 -5 -6 2.0 1.3 10.8Sensitiv

ity analysis

: no informal

ity d

1 128.1 22.4 -16.1 -16.02 49.3 3.4 -9.8 -9.43 32.3 -0.4 -9.1 -8.54 22.9 -2.2 -8.5 -7.65 16.3 -4.0 -9.0 -7.46 11.2 -5.1 -9.1 -7.07 5.9 -6.3 -9.5 -6.68 1.5 -7.6 -10.4 -6.49 -3.0 -9.2 -11.3 -6.0

10 -9.7 -11.9 -13.1 -5.2 All 2.8 -8.0 -11.3 -6.3

Source: Author's estimates using data from ENIGH 2008, Cuenta Pública 2008, SHCP (2010, 2012). a. Net monetary benefits are direct transfers and indirect subsidies net of dierct and indirect taxes. b. Direct taxes include contributions to social security. c. Benchmark: all rural consumption and informal urban consumption (informal markets) is assumed not to pay indirect taxes. VAT and excise taxes are imputed based on the SHCP (2012) decile estimates using this definition of informality. d. Indirect tax sensitivity analysis: all consumers are assumed to pay indirect taxes. VAT, excise taxes, and two special taxes on cars (Tenencia, ISAN) are imputed separately based on the SHCP (2012) decile estimates without assuming informality.