Infrastructure Spending is at a Critical Point for 2025

The investment in infrastructure that supports Mexico's social and economic growth is set to experience a real cut of 12.7% next year, which translates to 121.5 billion pesos less compared to what was approved to conclude 2024. According to the Ministry of Finance and Public Credit (SHCP), in the General Criteria of Economic Policy for 2025, 836.6 billion pesos will be allocated for physical investment, a decrease from the 958.1 billion approved for this year. This adjustment for 2025 is a result of the completion of several flagship projects from President Andrés Manuel López Obrador's government in his final year, as well as the Treasury's goal of reducing the public deficit from 5.9% of GDP in 2024 to 3.9% for 2025.

“For many years now, investment spending has become a usual adjustment; when cuts are needed, they are made to investment,” commented José Luis Clavellina Miller, director of Research at the Center for Economic Research and Budgetary Studies (CIEP). This impacts the management of public finances and, consequently, the country's economy, as a decline in public investment often translates into a reduction in private investment, leading to slower economic growth and a decrease in tax collection. “It's a negative cycle that we seem to overlook: by investing less, we grow less and collect less in the future. It is crucial that we not only prevent a decline in investment but also consider how to finance future productive projects,” Clavellina added. Furthermore, cuts in physical investment lead to less dynamism in sectors like construction.

“When spending is reduced in this way, especially in physical investment, there are economic sectors that are severely affected, such as construction in this case. Think about how many jobs were generated by projects like the Mayan Train or the Felipe Ángeles International Airport; if there are no new projects to replace those that are finishing, many construction workers will find themselves unemployed. After a boom in construction, they now face a challenging phase, as there are no works to replace those that are concluding,” observed Manuel Herrera, vice president of the National Committee for Economic Studies of the Mexican Institute of Finance Executives (IMEF). He noted that this isn't the first time the government has made such cuts, as in 2015, following the drop in oil prices, spending was also restricted to balance public finances. “It's a common practice, and there are sectors that suffer its effects, such as construction and energy,” Herrera concluded. According to figures from the Treasury, spending on physical investment will be less than the cost it will have to cover in debt interest, which will reach 1.4 trillion pesos in 2025, in addition to the proposed debt ceiling of 1.5 trillion. Domingo Figueroa, president of IMEF, emphasized the need to invest in infrastructure to maintain competitiveness and attract private investment, especially to capture the return of investments that moved to Asia and are now looking to establish themselves near the robust U.S. economy. “One of the major obstacles to achieving nearshoring is precisely the lags in basic and clean infrastructure, such as energy generation, roads, gas pipelines, and ports; these challenges must be addressed to compete internationally. The lack of infrastructure could seriously harm the arrival of new investments to our country,” Figueroa highlighted. Herrera added that the private sector can mitigate the lack of public investment through concessions.

Comment: The economic reality Mexico currently faces highlights the delicate balance between public spending and sustainable investment. While cuts may be necessary short-term measures to balance finances, in the long run, they can lead to stagnation in growth and, consequently, a reduced capacity for the government to generate revenue through taxes. It is essential to seek innovative ways to incentivize private investment, as well as ensure that infrastructure projects are not only competitive but also sustainable for the country's future growth.