Fuel Subsidies in Mexico: A Burden on the Budget

Specialists warn that containing the price of gasoline and diesel through subsidies helps to soften the blow to consumers, but it implies a direct cost to public finances by reducing the Mexican government's revenue. Amid the international rise in fuel prices due to the conflict in the Middle East that began six weeks ago and has blocked trade in the Strait of Hormuz, through which 20% of the world's oil trade passes, the Mexican government has begun applying fiscal stimuli to the special tax on production and services (IEPS), affecting its tax revenues. Why do specialists view the IEPS adjustment negatively? Analyst Manuel Herrejón stated that the IEPS adjustment cushions the pass-through of the oil price increase to the final price, but does not eliminate the economic cost, but rather moves it to the fiscal front. «Through IEPS stimuli, the Treasury adjusts the tax burden on fuels to smooth the movements of the final price to the consumer. It does not defer them, does not recover them later: simply stops perceiving them», he pointed out. Additionally, he warned that when the final price does not fully reflect the real cost of fuel, incentives to improve energy efficiency and logistics are also weakened. How much would the annual cost of gasoline stimuli amount to? According to Banamex estimates, the annual cost of containing the fuel price increase could reach 22,000 million pesos, while BBVA Mexico has estimated that the lower IEPS revenue from gasoline could reach 38,000 million pesos. In parallel, the Treasury has affirmed that this mechanism will be maintained to support consumers and transporters, although subsidies have not yet reached 100% for gasoline and diesel. At the same time, the government has also pushed agreements with gas stations to contain prices, while President Claudia Sheinbaum ensured that these subsidies represent about 5,000 million pesos per week. The pressure comes at a time of inflationary upturn, where the National Institute of Statistics and Geography reported that annual inflation rose to 4.59% in March, with an advance of 5.05% in the non-underlying component. Banxico indicated that between January and the first half of March, non-underlying inflation increased, and among other factors, greater variations in electricity and gasoline weighed in. In this context, Herrejón proposed that the underlying debate passes by reinforcing refining, production, and infrastructure to reduce external dependence and the need for recurring stimuli. «When oil rises, the government reduces the tax; when it falls, it recomposes it», he explained. In his judgment, stability «is not free», because what is not paid at the gas station is left uncollected in another way, with implications for the budget and public spending. «Every time the government reduces the IEPS to contain the price of gasoline, it renounces tax revenues».