Government announces tax relief for small businesses
The government is grappling with a difficult policy dilemma: it is compelled to implement a sharp fiscal adjustment to achieve a zero primary deficit target agreed with the IMF, but it also wants to fuel the economy to improve its electoral chances in the October general election. The increase in the tax-free threshold had actually been included in the 2017 tax reform, but implementation had originally been planned for 2022. The threshold will now rise toPs17,500 (about US$450), up from the Ps7,004 (US$179) set for 2019. The measure is expected to benefit about 19,500companies and will involve around 200,000 workers. The fiscal cost is expected to amount to Ps3bn (about US$700m, or 0.2% of projected GDP) this year.
Businesses welcomed the announcement, but highlighted the need for further relief. Manufacturers are struggling amid high tax pressure, high financing costs and decreasing domestic consumption. Manufacturing output decreased by 5% in 2018, according to the latest data from the national statistics institute. In November the number of formal workers in the manufacturing industry fell by 5.2% year on year, nearly three times the rate of job losses in the formal economy overall. Traditional players in manufacturing have been hit hard. One US company, General Mills, decided to sell its stake in a local food processor; Canale, a local producer and exporter of canned food, declared bankruptcy in late2018. Important local players in the textile industry, such as Alpargatas, have closed factories on the back of the consumption slump and increasing competition from Asia. Many car assemblers have announced temporary production freezes, in order to liquidate stocks.
In this context it seems clear that, although the government's latest tax concession will provide some relief to small businesses, the measure is likely to have only a marginal impact on employment or production. Much will depend on the trajectory of this year's recovery, which we expect to begin in earnest in the second quarter as a much-improved harvest boosts investment.
Impact on the forecast
We continue to forecast an economic recovery this year, and a victory for the president, MauricioMacri, in October's election. The latest tax concession supports both these forecasts, but in itself will have only a marginal impact.