Mexico's Fiscal Overhaul Is Pain for Gain

The howl of condemnation heard in Mexico in response to the fiscal-reform proposal President Enrique Pena Nieto unveiled Sept. 8 is not surprising: The plan angered political allies, irked the private sector, worriedbondholders and scaredthe middle class. Yet, though not perfect, the reform provides a needed overhaul of the Mexican economy.

The plan aims to raise government revenue by approximately 1.4 percentage points of gross domestic product next year, through taxing a host of goods and services and slashing exemptions. But it would also raise spending, by creating a new unemployment insurance system for instance, which added to the country's oil-investment budget would increase the government deficit to about 3.5 percent of GDP next year, the highest deficit level in 24 years according to Barclays Plc. Moreover, the proposal would raise debt issuance 35 percent above what was planned for this year, which may be a problem given that investors are already fleeing emerging-market debt as the U.S. Federal Reserve prepares to tighten monetary policy.