Mexico is the second largest economy in Latin America and the second country in terms of population. Member of the G20 and the Organization for Economic Cooperation and Development (OECD) since 2011, it is considered as one of the great emerging economies today. In addition, Mexico has a strategic and unique position at a geographical level, as a bridge between North America and Latin America and the Caribbean (LAC) and is considered a key actor in the multilateral, political, cooperation and investment spaces.

Thus, Mexico has become a strategic partner country for the European Union (EU). In the regional Multiannual Indicative Program (MIP) for Latin America and the Caribbean (2021-2027) of the European Commission (EC), and more specifically, in the section dedicated to Mexico, the commitments and links of the EU with the country are based on 3 priority areas: support for the modernization and implementation of the new EU-Mexico global agreement, addressing the global challenges related to climate change, and supporting support for social cohesion and the fight against inequality.

In Mexico, the crisis caused by COVID-19 has revealed the fragility and deficiency not only of public services, but in general of social protection institutions and programs (for example, regarding access to food of quality, to education, in women's access to employment, or in the formalization and regularization of work), especially among the most vulnerable population. The consequences of these changes are aggravated in a context in which social inequalities, which were already at worrisome levels, have increased.

This situation led to a consequent reduction in trust in institutions and in democracy, and underlines more explicitly the need to reassess the relationships established between citizens and the State, the tax system and welfare policies. Above all, in a country like Mexico, where the political response to mitigate the socioeconomic effects of the pandemic has been quite limited compared to other emerging powers, due to low levels of tax collection. Anyhow, financial resources dedicated to these social policies have been scarce, especially in comparison with other budgets (for example, in relation to security policies), and on many occasions have not lasted in the past time, which correspond to occasional interventions with little degree of sustainability and appropriation by the citizens.

In this sense, this project responds to several of the most unstable challenges in Mexico: institutional fragility, increase of inequalities, and increase of insecurity or lack of a more equitable and sustainable growth system.

The relevance of this Action is also linked to the guidelines of this project with the National Development Plan (2018-2024) of Mexico, which seeks the creation of new infrastructures, guaranteeing access to rights and welfare programs, promoting peace in the country, and the reduction of socioeconomic inequalities. A Plan that, precisely, is being hindered in part (and again) by low tax collection, which makes it impossible to translate the narrative of this document (and its consequent social programs) into tangible results in terms of poverty reduction and increased redistribution of wealth and social mobility.

Thus, this Action also adds to the broad consensus among different actors (among them the International Monetary Fund or the OECD) on the need to expand Mexico's fiscal margin and, therefore, to reduce the levels of labor informality. In addition, it is aligned with the strong and growing demand of several Mexican States, which have expressed their political will and commitment to modernize their fiscal and financial administrations to give a better response to the existing socioeconomic challenges, and to be able to deepen the process of decentralization and increase of democracy at the local level. Greater collaboration between States in this sense could be decisive for the modernization, improvement, efficiency and accountability of their tax system, and for the coordination at the regional level of tax policies (which could pave the way for adjustments or reforms).

On the other hand, this project is particularly relevant as it arises from the solid relations that have been established between the EU and the State of Guanajuato since 2014, and that are the result of a series of accompaniment processes and technical assistance that have been developed (for example, through public cooperation projects such as EUROsociAL+ or SOCIEUX+). Specifically, ten of these States (Aguascalientes, Chihuahua, Coahuila, Guanajuato, Jalisco, Michoacán, Morelos, Querétaro, Yucatán and Zacatecas), represented by various political parties, have already committed to the State Tax Model: with this process of strengthening and modernization that have been sponsored by the EU, under the leadership of Guanajuato in particular. Moreover, these regions have already collected and identified the priority issues and a series of demands for technical support and exchange to be developed in this project, related to issues such as legal and regulatory frameworks, revenue collection, incentives for formalization or an efficient and fair spending system. Additionally, it is expected that the number of States will increase progressively once the project implementation period begins.

Description of the project:

The general objective of this project is to contribute to reducing inequalities and reinforce social cohesion while promoting sustainable and inclusive development.

The specific objectives are:

• SO1: Improve efficiency of tax collection of the State, by enhancing digitalization
• SO2: Improve efficiency and transparency of allocation and control of expenditures
• SO3: Strengthen tax governance at the level of states and municipalities and guarantee coordination and cooperation at different levels
• SO4: Promote formalization and tax measures to accompany small and medium size enterprises and their employees ;

The direct beneficiaries will be the ministers of finance at the federated level of 10 Mexican states from Aguascalientes, Chihuahua, Coahuila, Guanajuato, Jalisco, Michoacán, Morelos, Querétaro, Yucatán, and Zacatecas.

The component coordinator will implement SO2, and more precisely:

SO2.1: Tools to improve the efficiency, control and quality of public expenditure are implemented and/or strengthened throughout the budget cycle, enabling evidence-based decision-making and ensuring allocation resources aligned with the 2030 Agenda, including gender mainstreaming.

SO2.2: Gender-responsive, inclusive and sustainable expenditure planning and prioritization regulations and strategies are in place.

And follow-up closely with the implementation of:

SO4.2: Laws, regulations and strategies on tax and social security incentives at the federal level that promote the formalization of micro, small and medium enterprises are better disseminated and/or implemented

Regarding component 2, the targeted activities are:

- Support for Gender Sensitive Budgeting

- Support for procurement processes.

- Support for the evaluation of expenditure with a gender perspective (Spending Review)

- Support for performance evaluation mechanisms and State results-based budgeting.

- Support for the planning and prioritization of expenditure, gender-sensitive, inclusive and sustainable.

The activity of component 4 to follow concerns the development of federal regulations on social protection to promote the formalization of employment, which will be implemented by a long-term expert but requiring follow-up by the coordinator.

The other activities will be implemented by the FIAPP.