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Mexican Budget Takes Prudent Line

Mike Godfrey, Tax-News.com, New York

07 December 2000


Just five days after the inauguration of Vicente Fox as President of Mexico, his finance minister, Francisco Gil Diaz, presented a budget to Congress yesterday which includes a halving of the fiscal deficit from 1% to 0.5% of GDP and a major improvement in tax collection which brought in a meagre 11% of GDP last year - even worse than Russia, on 13%. Of course, such figures refer to the measured economy, not to the whole economy. In Russia the black economy is reckoned to represent 50% of the total, and the situation may not be much better in Mexico.

In order to achieve the forecast 6% improvement in collections, Mr Gil Diaz is offering a tax amnesty covering the last four years for those taxpayers who file tax returns for 2000. He also plans to simplify the intimidating tax-filing process and will encourage different payment methods including on-line filing.

The $150bn budget assumes growth of only 4.5% next year, down from a sparkling 7.1% this year, and reflecting an expected downturn in the US economy, together with lower oil prices, the two main exogenous factors impacting Mexico's economic performance.

This budget is seen as conservative, and will support efforts by the central bank to meet an inflation target of 6.5 per cent next year.

Vicente Fox, a former Coca-Cola executive, has long said he plans to fight Mexico's social problems with stable economic strength, rather than by handing money to the country's poor, as former Mexican governments have tended to do, enlarging the fiscal deficit and stoking inflation. In fact his budget largely continues a track laid down last year under former President Ernesto Zedillo, using austerity measures to cut the country's fiscal deficit.

Fox now faces the challenge of pushing the budget through a divided Congress; his administration professes confidence that the budget will be easily passed by its Dec. 31 deadline, but the former ruling party will likely push for higher spending to fight poverty and improve education and health.

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