- The composition of the Chamber of Deputies of the new Congress will challenge President Andrés Manuel López Obrador’s ability to enact constitutional changes and consolidate the agenda of his party, Morena.
- Companies should watch the coming budget battle in Congress because of its implications for the economy overall and for tax collection.
- Prospects for a major tax reform that López Obrador was considering earlier this year seem to be dimming, leaving the government with few options other than closing loopholes and increasing tax pressure on existing payers to meet the government’s social spending goals.
López Obrador’s Government Passes the Halfway Mark
This week Mexico’s Congress for the next three years and the second half of the López Obrador administration began. June’s midterm elections reflected the country’s political plurality, a strong and efficient electoral system –in spite of high political polarization, Covid-19 and the presence of organized crime– and the natural weakening of the incumbent government and its party.
President López Obrador’s party, Morena, and its allies lost 52 seats in the Chamber of Deputies, and now have 278 out of the Chamber’s 500 seats. There were no races for the Senate, which renews only every six years, and where Morena and its allies hold a simple majority (75 out of 128 seats). The governing coalition took 11 governorships and now controls 16 of the country’s 31. It also will have an absolute majority (50%+1) in 18 state legislatures. With this outcome, López Obrador and his allies came short of the supermajority needed in both Houses of Congress, as well as a majority of state legislatures, to pass constitutional reforms. The general perception is that López Obrador, although remaining popular and with high approval ratings (57%), lost ground in June’s election and can be defeated.
What is at Stake
At the outset of his administration, López Obrador outlined an ambitious reform program. He has attempted profound changes on several policy fronts, including energy, the judiciary, public health, and pensions, among others. Several of these changes have been challenged in the courts or were blocked by the political opposition. However, the President has made clear his intent to continue pressing on with his agenda, including a comprehensive electoral reform that is widely believed to be designed to favor his party. His prospects, however, are limited by Morena and its allies lacking a congressional supermajority for constitutional changes, and by the fact that they hold a smaller legislative bloc than in the past, even for “must move forward” ordinary legislation like the budget.
What to Watch
Political maneuvering will start early in the first congressional period (September 1 to December 15) given the present context and that time is not in favor of the President (who is prohibited by law to run for reelection).
- During the past Congress, the President was able to maintain strong party discipline. This will become harder as the administration’s end nears and the race for the 2024 presidential election picks up. The President has already named a list of potential Morena candidates for 2024.
- One of the first fights that will take place in Congress will be over the distribution of committee chairmanships. The result will help gauge the Morena’s capacity to control the legislative process.
- The government will submit the Budget and Revenue Law on September 8. Most analysts expect a fierce legislative battle. The opposition will try to limit funds for the President’s main programs and projects. With respect to taxes, the government must find additional revenue to cover expenditures, but prospects for a major tax reform or an expansion of the tax base seem to be dimming. Given the President’s recent pledge of “no new taxes”, which appeared to be driven by both political calculations and concerns over lagging growth and investment, Morena seems more likely to move to close tax loopholes and harden collection measures and audits for current taxpayers.
- Early on, Congress is expected to take on legislation to regulate next year’s the referendum on whether the President should continue or not his mandate, something he has set at the center of his direct democracy agenda, though it has been widely interpreted as a strategy to galvanize his base more than anything else. Similarly, the President announced that he will push for a comprehensive electoral reform which would, among other things, renew all members of the National Electoral Institute and the Electoral Court. These two issues are likely to contribute to the current polarized environment and keep legislators busy throughout the next couple of months.