2026 Budget: Public Spending Focused on Obligations Leaves Little Room for Essential Services

Congress has approved the Revenue Law (LIF) and the Federal Expenditure Budget (PEF) for 2026, thereby determining both the sources and uses of government funds for the coming year. The package forecasts total income of 10.193 trillion pesos, allocating every peso of this amount by combining tax revenue and other government receipts with increased borrowing.

According to the approved schedule, 85.5% of funds (8.721 trillion pesos) will come from taxes, fees and government charges, social security contributions, oil revenues, and public enterprises’ services, while 14.5% (1.472 trillion pesos) will be financed through debt. Structurally, Mexico still collects less revenue as a share of GDP than the OECD average, although tax enforcement and collection efficiency have improved in recent years without major changes to the tax code. The trend of lower oil income compared to previous decades continues, so the tax base and domestic economic activity will remain key determinants.

On the expenditure side, over 57% of the budget will go toward mandatory outlays that grow automatically: pensions and retirements, transfers to states (participations and allocations), and the financial cost of public debt. This component takes up a growing share of the budget due to factors such as demographic changes, inflation-indexed payments, and still-elevated interest rates, reducing room for discretionary spending and new projects.

The public sector’s debt cost—which includes the federal government, Pemex, and CFE—rises to 1.613 trillion pesos. Its trajectory will depend on monetary policy normalization and exchange rate fluctuations: a cycle of falling interest rates and a stable peso would gradually ease the financial burden, but risks persist due to global volatility, higher risk premiums, or added support needs for state-run enterprises.

Essential functions such as agriculture, education, housing, health, culture, security, and economic support programs will receive 2.446 trillion pesos, equivalent to 24% of total spending. This limited margin creates tension in funding public services amid rising demand, especially in regions attracting nearshoring investments and therefore requiring enabling infrastructure—energy, water, logistics—and stronger local capabilities.

States will continue to receive a significant share of resources through federal transfers. Heavy dependence on these federal funds highlights the need to strengthen local revenue generation and improve subnational spending quality. Timely and transparent execution will be crucial to translating the budget into actual projects and services, particularly in industrial and border corridors where pressure on urban services and security is greatest.

On the macroeconomic front, activity could be sustained by manufacturing exports and consumer spending, while public investment faces the challenge of balancing fiscal consolidation goals with infrastructure needs. Inflation has been converging toward target, opening the door for less restrictive monetary policy; if this materializes, it would help moderate financing costs and, with resilient employment, maintain revenue collection. Nevertheless, the performance of the U.S. economy, energy prices, and Pemex’s situation will remain risk factors.

In sum, the 2026 fiscal package relies on strong ordinary revenues and increased financing, but the weight of automatic commitments limits the space to expand essential services and investment. Disciplined execution, prioritizing high-impact projects, and further gains in tax-collection efficiency will be vital to safeguarding stability and seizing opportunities from supply-chain relocation.

Outlook: The budget reflects an economy with reasonably solid revenue foundations but a tight fiscal space squeezed by pension and debt costs. The trajectory of interest rates, the exchange rate, and the ability to channel resources into productive investment and public services will shape the fiscal stance and its impact on growth in 2026.