Mexican President Enrique Pena Nieto delivers a speech during the opening ceremony of the III Mexico-Caribbean Community Summit in Merida, Yucatan, on April 29, 2014. / Yuri Cortez, AFP/Getty Images
MEXICO CITY - Silvia Acuña sells soda in increasingly bigger bottles at her mom-and-pop shop near the president's office.
She says the preference is less an effect of Mexicans guzzling more soda than an attempt at economizing as rising prices and new taxes, including a one-peso-per-liter levy on sugary drinks, leave people pinching their pesos and buying bargain brands instead of Coca-Cola.
Numerous tax hikes took effect Jan. 1 to raise badly needed revenue in a country rife with tax evasion and overly dependent on money from the state oil agency Pemex. A growing chorus of critics insists the tax increases are harming the economy, which underperformed in 2013 and shows early signs of struggling through 2014. Consumer confidence has crumbled and people are putting purchases on hold.
"Fiscal reform hit consumption in a way that was much harder than the government expected," says Deborah Riner, chief economist with the American Chamber of Commerce in Mexico City.
The impact from the tax increase is hurting the popularity of President Enrique Peña Nieto. His agenda of changes in areas such as energy, education, competition and labor markets have won accolades from analysts and international investors, but many Mexicans are not impressed.
Recent polls put Peña Nieto's approval rating below 50%. A survey for the Reforma newspaper found 53% of respondents saying the fiscal changes have not benefited the economy, and 39% reporting their financial situation was worse than a year ago.
"We now have almost a year and a half of a government that has achieved many reforms, which have promised many things that have not materialized in economic growth or improvements in Mexicans' incomes," says Gerardo Esquivel, economics professor at the Colegio de México,
The federal government brokered a deal last fall with factions of the left-wing Democratic Revolution Party (PRD) to win approval for a fiscal change that raised taxes on high-income earners, increased the value-added tax (IVA) in border regions, introduced a capital gains tax and reduced business deductions, among other measures.
Business group Coparmex says the change has increased hiring costs by 7%, while investments by businesses have dropped.
"Modifications must be made that go toward promoting more investment and employment," Gerardo Gutiérrez Candiani, president of the Business Coordinating Council (CCE), another business group, told Reforma.
Meanwhile, Peña Nieto remains confident on the changes.
"The fiscal reform will raise the productivity of the country because it promotes formality and increases public investment in strategic areas such as education, science and technology and infrastructure," Peña Nieto told an industrial group last month.
The Finance Ministry blames the economic weakness in Mexico on sluggishness in the U.S. economy. It forecast GDP growth of 3.9% for 2014, but many private-sector economists now project an economic expansion around 3%. The slow start follows a tough 2013, when the economy only grew by 1.1%.
"We had a tough first quarter. Why? The fiscal reform was recession-inducing," says Manuel Molano, adjunct-director of the Mexican Institute for Competitiveness. "We still have a strong export sector that is doing well. But I would say that the domestic market is in a recession, if you take out the figures for exports."
The export sector is showing signs of strength. Automobile manufacturing has increased 5.8% over the first four months of 2014, according to the Mexican Auto Industry Association.
However, Mexico's internal economy appears anemic. The consumer confidence index crashed in February to its lowest level in four years, although it slightly rebounded in March and April.
"People who used to spend their money are using it to pay their taxes," Riner says.
It's uncertain if the attempt at increasing government revenue in 2014 will materialize. The government reported 9.4% lower tax revenue in February than the same month of 2013.
Coparmex President Juan Pablo Castañón expects growth to increase in the second half of 2014 as the impact of government spending - up 19% in the first two months of 2014 - is felt in the economy and ground is broken on infrastructure projects.
The federal government announced plans April 28 to spend 7.7 trillion pesos ($595 billion) on 743 infrastructure projects to be completed by 2018, in an attempt to stimulate the economy further.
"We believe that the (spending) will have a positive impact on the Mexican economy in the medium and long-term," Mexican bank Banorte-Ixe said in a research note.
Some analysts question the track record of government spending in Mexico, calling it "inefficient," and pointing to incidents that prompt people to evade taxes - such as corruption, poor public services and scandals, such as 30,000 teachers being put on the payroll but not teaching classes.
"In order to be good, spending has to be efficient," says César Velázquez, public policy professor at the Iberoamerican University. "It's not clear that's happening in Mexico."
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