MEXICO CITY — In an ever-increasing gallery of populist leaders, Andres Manuel López Obrador is a bit of a riddle. While he professes allegiance to the left wing of the political spectrum, he is also a fiscal hawk. I have long argued that eventually, AMLO would have to solve this inextricable contradiction: you cannot be Thatcher and Mitterrand at the same time.

I had also assumed that eventually the needle would move towards a bigger government. At about 25% of gross domestic product (GDP), government expenditure in Mexico is relatively small when compared with Brazil’s 38%, according to data for 2020 by the International Monetary Fund. Moreover, the country’s income and regional disparities are painfully wide. The stage was thus set for a social-democratic solution to AMLO´s dilemma, particularly as his ample political capital would allow him to increase revenues via a tax reform.

Yet, neither the pandemic, nor the third change at the helm of the Ministry of Finance have led to a change of course. The substitution of Arturo Herrera by Rogelio Ramirez de la O (RRO) had little to do with preparing the ground for changes on the revenue side. The 2022 budget proposal assumes total and tax revenues at 21.9% and 14% of GDP, respectively, with optimistic assumptions about GDP growth (4.1%) and tax-collection gains (up 6.4% y/y in real terms). Moreover, as it has been customary, the oil production estimate at 1.8 million barrels per day remains stubbornly upbeat.

In terms of fiscal balances, a welcome change under RRO is the projection of a slight primary deficit (0.3% of GDP), a preferable scenario to the practice under Herrera of claiming you were reaching fiscal balance while drawing down trust and funds held by the government.

Broadly speaking though, on the fiscal front things are unlikely to change substantially in the second half of AMLO´s administration. What are the costs of staying in this course? They involve the quality of expenditure: the government might not spend more than previous administrations, but it does spend significantly worse.

AMLO’s reasonable call for fiscal austerity in 2018 has morphed into a palpable deterioration of government’s managerial capabilities only three years later. A cap on salaries – nobody can earn more than the President – as well as a reduction in the number of up- and mid-level officials is politically popular but begs the question on whether the government has the required human resources to perform its most inherent and pressing functions.

Unfortunately, we have found out that for a President who abhors technocrats, the solution has been to fill the posts with political allies, irrespective of expertise on the subjects. Mexico’s bureaucratic apparatus thus no longer has a spine and discretionary decisions made at the top go uncontested and are poorly executed.

The case of the energy sector is well known, and the 2022 budget proposal allocates a hefty 21% of total programmable spending to Petroleos Mexicanos, PEMEX, and to the power conglomerate Comision Federal de Electricidad, known as CFE, two monopolies mired by mismanagement.

But those cases are not unique: social policy is no longer driven by means-tested targeted interventions and increasingly reflects AMLO´s penchant for universal pension schemes as well as for his flagship initiatives, such as “Youths Building the Future”.

Accordingly, recent income and expenditure surveys by INEGI show that social transfers to the richest 50% of households rose 114% between 2018 and 2020 vs. a 17% gain for the poorer half. The improvised replacement of the universal health-care scheme (Seguro Popular) by a new institute that attempts to re-centralize these functions (INSABI) left 15.6 million Mexicans without basic health-care services as COVID-19 was dangerously looming backstage.

We therefore have to live with the paradox of a strong President leading a weakened state. However, the bond vigilantes can relax as a sudden turn for the worse in the fiscal front is unlikely. The unbearable reality is that economic growth and government effectiveness become the adjusting variables, and the extent of their deterioration will take longer to become evident. Mexico´s fiscal risks are not of explosion, but of implosion.