Textbook populism fueled Mexico’s debt and now it’s near breaking point

The Tren Maya, one of former President López Obrador’s controversial and expensive infrastructure projects. Image credit: Tren Maya / X.

by Macario Schettino.

Editor’s note: Mr. Schettino is an eminent Mexican economist and retired professor at Monterrey Tech’s School of Government.

——

As the United States debates the One Big Beautiful Bill Act (OBBB), there may also be public discussion around that country’s fiscal sustainability. The US isn’t the only country struggling with the size of its debt — it's actually a very common issue among industrialized nations. But the issue is particularly important for Mexico.

Mexico has long been one of the countries with the lowest tax collection rates in the world, measured as a share of GDP. Prior to the 2013 tax reform, tax revenues were below 10% of GDP, supplemented by oil revenues and income from state-owned enterprises and agencies, bringing the total to about 18% of GDP. That was all the government had to fund its expenses — hence the poor coverage and quality of public services.

Although Mexico joined the global trend toward a welfare state starting in the 1960s, it never enacted a fiscal reform capable of funding its growing obligations. While many attempts were made, only one succeeded — in 1980, with the creation of a value-added tax. The next major reform came in 2013, raising tax revenue from 8% to 14% of GDP. With that, the government’s total revenues reached 22% of GDP.

Those revenues, along with a moderate deficit, allowed for spending close to 24% of GDP — still insufficient to fully meet the government's responsibilities at a reasonable level. However, under former President López Obrador’s administration, public spending increased significantly without a corresponding increase in revenues. As a result, the deficit has skyrocketed.

The additional expenditures under López Obrador fall into two categories. First, massive investments in white elephants, each costing around $25 billion: the canceled airport and its smaller replacement, the Dos Bocas refinery, and the Maya Train, which cost twice as much as estimated. These $100 billion cannot be recovered — none of the projects generate enough income to even cover their operating costs.

The second type of additional spending is direct cash transfers. Due to Mexico’s large informal economy, two out of three people lack access to social security. López Obrador saw a major political opportunity in this and, starting in his time as head of Mexico City’s government, offered payments to senior citizens. As president, he extended this to all older adults nationwide, whether or not they had a pension — gaining massive political support in return.

Mexico had already struggled to cover pensions for those in the formal social security systems, and this decision has effectively doubled the cost. The total cost of cash transfers is now almost equal to the entire social security system.

Thanks to these two additional expenditures, involving enormous sums, 2024 gave the impression of a successful economy. That smoothed the way for López Obrador’s candidate to win the election. To avoid any risks, however, he intervened in the campaigns himself (illegally), funded his candidate with public resources, used government personnel for campaign purposes, among many other irregularities.

This is a textbook case of populism. Mexico’s public debt, which stood at 10.5 trillion pesos at the start of López Obrador’s term, now amounts to 17.7 trillion. As a share of GDP, it has risen from 42% to 51%, and with the trend observed in recent months, it threatens to reach 57% by year-end.

This may not seem like much compared to debt levels in industrialized countries, but it's important to remember that tax collection is the key reference point in determining whether a country’s debt is large or small. Considering that Mexico collects only 14% of GDP in taxes, adds a couple more points through social security contributions, and perhaps another small portion from oil revenues, its reliable income doesn’t exceed 18% of GDP. Including income from state-owned enterprises and agencies, you might set a benchmark of 20%. That means the maximum sustainable debt level is about 60% of GDP (according to the traditional economist’s rule: multiply annual revenue by three).

The risk of debt approaching that level is that Mexico could lose its investment-grade credit rating. That would trigger sharp adjustments in interest rates and the exchange rate. In the current climate of heightened global uncertainty (which the OBBB will surely exacerbate), this risk must not be underestimated.

But as we said, this is a textbook example: you cannot invent an economic boom without consequences.