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Mexico's PRI May Widen Deficit, Raise Oil Price to Cut Tax, Videgaray Says
 Jonathan Roeder & Adriana Lopez Caraveo - Bloomberg
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September 23, 2010
Mexico’s largest party in the lower house of congress may propose a wider deficit and increased oil price estimate for next year’s budget as it aims to cut the sales tax, the head of the budget committee said.
The opposition Institutional Revolutionary Party, or PRI, may call for a “modest” increase in the deficit from President Felipe Calderon’s “overly conservative” proposal of 0.3 percent of gross domestic product, said committee head and PRI member Luis Videgaray.
Mexico can cut the value-added tax and still avoid a credit downgrade from ratings agencies, Videgaray said. The PRI on Sept. 7 submitted a bill to cut the value-added tax to 15 percent from 16 percent just a year after it was increased to help boost government finances.
“A lowering of the value-added tax and an increase in public debt could be a bad recipe, but we’re going to be careful,” Videgaray said in a telephone interview late yesterday. “I’m convinced that we are going to have a responsible fiscal package.”
By law, Mexico can set the budgeted oil price as high as around $67 a barrel for next year according to a formula used to calculate the price, Videgaray said. Still, the PRI will probably propose a price lower than $67, he said.
The government, whose 2011 budget proposal includes no changes to tax laws, says it’s opposed to lowering the levy and that the decrease would cost the country 33 billion pesos ($2.6 billion).
Absorbing the Tax Cut
A third of the 33-billion peso reduction resulting from the tax cut would be absorbed by lower revenues going to states and municipalities and the rest would be compensated by spending cuts, Videgaray said.
Finance Minister Ernesto Cordero said yesterday that foreign companies may pare investment in Mexico if the sales tax is reduced.
“It could be considered an act of little responsibility that without a doubt would have important consequences for us,” Cordero told reporters following a congressional hearing on next year’s budget proposal.
Carlos Perez, the deputy coordinator for President Felipe Calderon’s National Action Party in the lower house, said on Sept. 20 that the PRI proposal to lower the sales tax would jeopardize the country’s credit rating.
Standard & Poor’s in December cut Mexico’s foreign-currency debt rating to BBB, the second-lowest investment grade, from BBB+, with a stable outlook, saying the government failed to broaden the tax base significantly. Fitch Ratings downgraded the country in November. Moody’s rates Mexico at Baa1, the third- lowest investment grade rating.
No Unanimous Support
There isn’t unanimous support for the value-added tax proposal among PRI members. Fidel Herrera, outgoing governor of Veracruz state and PRI member, on Sept. 21 said on the social networking website Twitter that he favored maintaining the value-added tax at its current level.
Last year’s tax increases were key to restoring confidence in Mexico’s finances this year and helped the country avoid following others into a “world of sovereign stress,” former Deputy Finance Minister Alejandro Werner said in February.
Videgaray said the PRI will likely go along with Calderon’s proposal to increase security spending. He said the PRI wants to increase spending on infrastructure and waterworks from the government’s proposal.
The lower house must approve the income portion of the budget by Oct. 20, and the spending portion by Nov. 15.
Videgaray said he will propose a bill to eliminate a business tax, known as the IETU, for small businesses that have annual revenue of less than 1 million pesos a year. The tax would still apply to medium and large businesses.
Thousands of businesses have submitted court appeals in recent years arguing that the IETU is unconstitutional, a claim that was rejected by the Supreme Court in February.
Some legislators and business groups in the past have called for congress to combine the IETU, which went into effect in 2008, and the income tax into a single levy.
To contact the reporters on this story: Adriana Lopez Caraveo in Mexico City at adrianalopez(at)bloomberg.net; Jonathan Roeder in Mexico City at jroeder(at)bloomberg.net
To contact the editor responsible for this story: Joshua Goodman at jgoodman19(at)bloomberg.net
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