Mexico Heads For Budget Disaster

by Mike Godfrey, Tax-News.com, New York

02 January 2002

Over the past two weeks, Mexico's Congress, paralysed by deep-seated differences between President Vicente Fox's National Action Party (PAN) and the majority opposition Institutional Revolutionary Party (PRI), has been vainly struggling to pass a budget for next year.

Facing a 31st December deadline, the lower house of the divided legislature managed to pass a bill Monday authorizing President Vicente Fox to increase taxes by 60 billion pesos, or $6.6 billion, less than half the amount the president sought. The lower house, by a vote of 455 to 5, approved an estimate of $160 billion in revenue for the next fiscal year, or $16.5 billion more than it expects to collect this fiscal year. The bill is a compromise and also runs counter to the government's effort to simplify the tax code by introducing additional taxes.

Fiscal reform was one of the central aims of President Vicente Fox, who took office late last year, and the negotiations are being closely watched by international investors. International rating agencies want to see the state increase its revenues from taxes before giving its debt a higher rating. The PAN had proposed levying new taxes on capital gains, soft drinks, telephone services and private education and extending the country's value-added tax to medicine and basic foods. Monday's bill included a 10 percent tax on some telephone services and 20 percent tax on soft drinks, to help boost taxes while avoiding the controversial value-added taxes on food and medicine proposed by the government.

Over the weekend, the lower house of Congress had approved a reform of income tax, taxing both companies and individuals at the same rate, raising about 43bn pesos ($4.6bn), much less than the 120bn pesos originally written in under this heading.

The President does not control either house of Congress, and relies on the support of the PRI in order to achieve consensus on legislation; but PRI leaders with long memories ascribe their loss of the presidency to an increase in VAT from 10% to 15% they pushed through in 1995, so they are extremely reluctant to be associated with yet further VAT increases.

Apart from tax increases, President Fox's original budget also called for Mexico to increase its oil production levels to more than 1.8 million barrels per day, up from the 1.7 million barrels the country now produces daily. But Mexico has since agreed with OPEC to slash oil production levels by 100,000 barrels per day next year. The decision means Mexico will lose tens of millions of pesos in would-be oil revenue and underlines the dramatic consequences for the state budget of any failure to agree tax increases - something that now seems next to inevitable. Monday's bill assumed oil production volume of 1.725m barrels a day.

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