Tensions between wealthier and poorer regions in some developed countries are well known. In Italy, for example, richer regions in the north of the country demanded in 2017 to have more autonomy over their own resources and to break away from the social contract that protects poorer regions through the redistribution of resources.
In Mexico, the social contract between wealthier and poorer states is also being threatened. 10 states in the north of the country are now seeking to break the legal agreement ‘Ley de Coordinacion Fiscal’ (Law of Fiscal Coordination) with the aim of gaining more control of their collected tax revenues.
The ‘Law of Fiscal Coordination’ establishes that each state in Mexico, and their respective municipalities, are responsible for collecting their local tax receipts and for delivering the total collected tax revenue to central government, which is responsible for the redistribution of these resources.
The law emerged as a response to the economic differences (e.g., real wage growth, productivity) across the 32 states that compose the country, including the capital Mexico City. It also emerged as a way to provide further protection to the most deprived and isolated communities. The 32 states have the autonomy to decide how best to meet the needs of their local populations through the provision of public services, particularly in relation to health and education services.
Political leaders of the 10 states seeking out for the rupture of the ‘Law of Fiscal Coordination’ have two main arguments for this separation. First, they argue that the resources they collect and receive are not equitable and that the more prosperous northern regions continuously subsidise southern regions, restricting the growth of the latter. Second, according to them, the tax revenues they provide to central government are used in national projects that have little benefit for their communities such as the development of the ‘Tren Maya’ (The Mayan Train) that aims to connect tourist destinations in the Gulf of Mexico. The rupture of the social contract also reveals the regionalism of northern states and their interest to break away from other states that do not share their cultural and racial identity.
The dissatisfaction of northern states regarding the redistribution of resources is not new but has strengthened because of the COVID-19 pandemic. Northern states have not received sufficient income to face the rising demand in hospitals and to promote local economic development amid the pandemic. At a national level, the government has also implemented austerity policies that have curtailed even more the resources that northern states can receive to face the outcomes of the pandemic.
The termination of the fiscal agreement could allow each state to have the autonomy to collect their local tax receipts and to redistribute these revenues within their own state without having to transfer these resources to central government.
Political leaders from the 10 northern states are only seeking to abolish this one law; they are not considering separating from Mexico altogether. However, recent tensions between central-regional government have led to trends in social media with the hashtag #Nortexit, where many citizens have argued in favour of the separation of the northern states from the rest of Mexico.
The implications of a possible rupture of the fiscal agreement
Although the Mexican president, Andres Manuel Lopez Obrador (AMLO), has argued that it is not possible to dissolve the fiscal agreement because it is protected under the Mexican constitution, various political leaders from the 10 states have initiated a legal consultation process to challenge this. They have also initiated a public consultation to understand the perceptions/opinions of their constituents on this matter.
Going further with the rupture of the fiscal agreement could have important negative implications for the social development of the country.
First, it could deviate the government’s attention and resources to overcome the economic and social difficulties caused by the pandemic. Mexico, as well as many other countries around the world, has faced a rise in unemployment, reductions in working hours and significant losses in households’ real disposable incomes. Income poverty and extreme income poverty have also risen in the country.
These are only some of the problems that require the immediate attention of the Mexican government. An alignment between central and local government on how to overcome these social problems, as well as an agreement on how the national resources should be utilised are more likely to provide a better outcome.
Second, the termination of the ‘Law of Fiscal Coordination’ could lead to further regional inequality and polarization between regions. On average, 80% of the revenue each state has available for spending on public services and investment comes from transferences (e.g., redistribution from central government) and only 20% on average is locally financed (e.g., debt). Under the current fiscal agreement, central government redistributes tax revenues in the form of ring-fenced resources (set aside to finance specific services and programmes) and non-ring-fenced resources (each state decides on what to spend the resources).
Southern regions receive on average a larger proportion of the ring-fenced resources to secure the provision of indispensable services such as health and education because Southern regions are poorer and less industrialised compared to central and northern regions. There is a concentration of industries with lower average real wages in the south of the country such as clothing, textile and the food and beverage industry. The latter impose important barriers for southern states to increase their tax revenue collection and to secure other forms of financing to provide local services and to promote local economic growth.
Finally, the rupture of the agreement could lead to a further erosion of trust between citizens and towards governmental institutions. Trust in Mexico has been eroded due to the increase in crime and violence the country has experienced in the last decades. Interpersonal and political trust in Mexico has also been damaged due to the embeddedness of corruption in the country. The termination of the agreement could further erode trust since citizens may perceive that institutions do not protect their interests and meet their expectations through an adequate redistribution of resources. Trust may also be eroded since citizens may perceive the termination of the agreement as a violation to the social contract rooted in sentiments of cooperation and solidarity, on which there is a common understanding on the need to protect the most vulnerable groups.
The termination of the fiscal agreement may or may not proceed depending on further legal consultations. Negotiations about the possible rupture of the fiscal agreement are already having a negative social impact. There is already a divisive public opinion on this matter and conflicts in the relationship central-local government impairs the government’s ability to overcome the difficulties brought by the pandemic COVID-19.
Disclaimer: All blogs published on this website express the views of the authors, and not of the Social Policy Association.