Mexico's Leftist Leaders Begin to Backtrack on Austerity

The president of Mexico’s Senate smiled into the camera and flipped the lid of his red Tupperware. No costly expense account meals for me, proclaimed Martí Batres, a senior ally of President-elect Andrés Manuel López Obrador, as he took to social media to challenge legislators to embrace austerity by bringing their own packed lunches.

In the lower House, another senior figure in López Obrador’s Morena Party, Mario Delgado, urged colleagues to follow his lead and bring in a thermos — a bid to save the 4 million pesos ($ 211,000) the Chamber of Deputies spent on coffee, tea, biscuits and refreshments supplies for July to December.

The austerity drive — championed by a president-elect who drives a modest car, lives in an unpretentious house and flies economy class to official engagements — is a cornerstone of the man-of-the-people policies López Obrador promises to enact to eradicate corruption and distribute wealth more fairly when he takes office on Dec. 1. They include giving up the presidential plane, slashing his own and senior public servants’ salaries, axing bonuses and scrapping nonessential jobs, programs and agencies to channel savings into development projects.

We want results, not promises.

César Rodríguez, maintenance worker and Morena supporter

López Obrador, who says the country is “bankrupt,” has even questioned whether Mexico really needs the flashy Norman Foster–designed airport that is under construction and wants a public consultation next month to ask citizens if they would rather just tart up an existing military airport instead.

There is just one problem: López Obrador’s team is having to row back on some of the austerity promises that have reassured investors worried by the president-elect’s leftist plans. He has vowed to balance Mexico’s books while spending billions on oil refineries and infrastructure that critics say are white elephant projects in waiting.

Take the planned salary cuts. Alfonso Romo, López Obrador’s pick for Cabinet chief, had to acknowledge last week that drastic reductions risked being counterproductive. “We have to be careful not to lose talent. We are adjusting our ideal to reality,” he told a business conference.

And Delgado admitted this month that although deputies’ bonuses had been slashed, there had not been immediate agreement on the scale of salary cuts. Senate leaders also agreed to keep snacks and refreshments when sessions drag on more than four hours, despite Batres’ lunchbox drive.

However, an austerity bill passed subsequently ensures public servants will not be allowed to earn more than López Obrador, who has set his salary at 108,000 pesos ($ 5,700) a month. Delgado said the cost of Mexico’s bureaucracy rose by a fifth under the current government of Enrique Peña Nieto.

As a result, many current middle- to senior-level officials are not hanging around to have their salaries slashed. Monica Graue, a partner at headhunter Atabay, says she has already been contacted by officials from the Ministries of Finance and Economy and the state oil company Pemex, among others, looking for private sector jobs.

“There are a lot of technical staff who are very qualified and have been [in the government] for years but they’re saying, ‘I studied and worked hard to get where I am, I’ve got a mortgage and two children, I can’t take a 40 percent pay cut,’” Graue says.

Some proposals from López Obrador, the son of shopkeepers, alarm investors and analysts. Grand plans to relocate ministries across the country are widely deemed costly and unworkable. “Don’t doubt [it will happen],” Romo insists. But he acknowledges, “How fast? We’ll have to see.”

As for the airport, the Mexican College of Civil Engineers estimates that reconditioning the Santa Lucía military base, providing transport connections and compensating companies for work already done would cost two-thirds more than finishing the new airport.

One of the most perplexing plans for some analysts is López Obrador’s pledge to reduce income tax to 20 percent from up to 35 percent and halve value-added tax to 8 percent along a strip of states that border the U.S. in a bid to boost growth.

“All this sounds very good and sells very well, but it will have a fiscal cost,” says Valeria Moy, head of México Cómo Vamos, a think tank. She sees little to stop companies shifting their fiscal domicile north to take advantage of the legal loophole.

The incoming government says the move could lose 40 billion pesos in tax revenue, but believes that would be offset by higher growth. Mexico’s tax revenue has increased in recent years, but at 17.2 percent of gross domestic product, it remains the lowest in the Organization for Economic Cooperation and Development.

Mexicans — even Morena voters — greet the austerity drive with a mixture of hope and skepticism. As César Rodríguez, a maintenance worker, puts it: “We want results, not promises.”