Mexico & Nafta - 13 January 2004
Pretty sensible
The government's apocalyptic pronouncements about what would happen to the economy if congress failed to pass tax reforms along with the budget, failed to shake congress. Congress threw out the government's budget, which had a large slice of fiscal reforms, and passed a more modest, but still sensible budget. The financial markets recognise this.
The lower chamber of congress finally approved the budget for 2004 on New Year's Eve. The tricky issue was the spending side of the budget: twice congress cancelled votes on the Ley de Egresos because deputies were not sure that the changes they wanted to make to the law had been made.
The changes in spending priorities were little more than tinkerings. Deputies from the two main parties, the Partido Revolucionario Institucional (PRI) and the Partido Acción Nacional (PAN), agreed to increase spending on education, health, infrastructure, anti-poverty programmes and agricultural support by M$37.5bn pesos (US$3.3bn, or just over 2% of the total budget spend).
To increase spending in these areas, projects espoused by other ministries were cut. The senate made life more difficult for the lower chamber by striking out, as expected, the increase in the tax on cigarettes. This trimmed US$244m from the US$146bn in budget revenues congress anticipated for 2004.
Significantly, congress backed down in one area where it was going to slash spending: the federal transfer to the already heavily-indebted Mexico City government. Deputies from President Vicente Fox's PAN and the smaller Partido Verde Ecologista wanted to trim the Distrito Federal's federal support by M$3bn. The political effect of this would have been to make life more difficult for the mayor of Mexico City, Andrés Manuel López Obrador, who is also the frontrunner for the presidency in 2006. AMLO, or `Peje' as he is nicknamed, is a big-government man: a lot of his popularity derives from his policy of giving cash benefits to the elderly and other previously ignored lobbies.
To the surprise of many commentators, the PAN suddenly switched and refused to back the cuts in the transfers which would have produced reductions in the Distrito Federal's budget. The gossip in Mexico City is that López Obrador threatened the government by saying that if his budget were cut he would portray himself as a victim of the government's economic mismanagement.
There were also some last-minute squabbles over how the road-building budget should be allocated. Priístas from Durango and Sinaloa claimed that the federal road-building projects were biased towards states such as Tabasco, Nuevo León and Oaxaca. These three states are run by supporters of the PRI leader, Roberto Madrazo. The PRI in both Durango and Sinaloa is less keen on Madrazo; several PRI deputies from these states support Elba Esther Gordillo, the deposed leader of the PRI in the lower chamber of congress.
The Gordillistas had wanted the PRI to back the government's plan for a fiscal reform as part of the budget. This was rejected by Madrazo, who then engineered a vote of no-confidence in Gordillo by the PRI deputies. She was replaced as the PRI leader in the lower chamber by Emilio Chuayffet. The Gordillistas still argue that the PRI was wrong to block the government's fiscal reform.
The core of the proposed reforms was a cut in income-tax rates and an extension of value-added tax (VAT) to food and medicine. Roberto Campa, a prominent Gordillista, said over the New Year that, because there had been no fiscal reform, congress did not have the resources to make a difference through the budget. All we are doing, he said, is sharing out misery. We're not, he added, allocating resources which will lead to economic recovery and the creation of more jobs. The government's proposed fiscal reform would have provided the government with an extra M$90bn (US$8bn) to spend in 2004.
The big problem with the tax structure in Mexico is that taxes amount to only 12% of GDP. The state-owned oil company, Petróleos Mexicanos, provides the government with a third of its revenues, but otherwise 5m Mexicans pay the bulk of the rest of the income taxes. Special interest groups such as unionised workers get benefits (such as no tax on overtime).
One significant but last-minute change to the budget was the dropping of the commitment to privatise, close or merge 18 state companies. These included the national news agency Notimex, the state-owned bits of the film industry, and the national lottery. Instead, congress stipulated that each government ministry should be restructured so that there was less duplication: in particular, it ruled that no ministry could have more than three deputy ministers.
The only substantial change that the lower chamber of congress made to the government's proposals for the revenue side of the budget (Ley de Ingresos) was to increase the forecast for income tax revenues by M$10.9bn (US$964m). The other (attempted) changes made to the revenue side of the budget were to impose a 20% surtax on the price of cigarettes and to exempt telephone services from the Impuesto Especial sobre Producción y Servicios. Congressmen argued that the budget they had passed was robust and would not lead to extra borrowing. Indeed, congress cut the authorised borrowing limit for 2004 by US$1.3bn, to US$7.46bn net.
The lower chamber of congress finally approved the budget for 2004 on New Year's Eve. The tricky issue was the spending side of the budget: twice congress cancelled votes on the Ley de Egresos because deputies were not sure that the changes they wanted to make to the law had been made.
The changes in spending priorities were little more than tinkerings. Deputies from the two main parties, the Partido Revolucionario Institucional (PRI) and the Partido Acción Nacional (PAN), agreed to increase spending on education, health, infrastructure, anti-poverty programmes and agricultural support by M$37.5bn pesos (US$3.3bn, or just over 2% of the total budget spend).
To increase spending in these areas, projects espoused by other ministries were cut. The senate made life more difficult for the lower chamber by striking out, as expected, the increase in the tax on cigarettes. This trimmed US$244m from the US$146bn in budget revenues congress anticipated for 2004.
Significantly, congress backed down in one area where it was going to slash spending: the federal transfer to the already heavily-indebted Mexico City government. Deputies from President Vicente Fox's PAN and the smaller Partido Verde Ecologista wanted to trim the Distrito Federal's federal support by M$3bn. The political effect of this would have been to make life more difficult for the mayor of Mexico City, Andrés Manuel López Obrador, who is also the frontrunner for the presidency in 2006. AMLO, or `Peje' as he is nicknamed, is a big-government man: a lot of his popularity derives from his policy of giving cash benefits to the elderly and other previously ignored lobbies.
To the surprise of many commentators, the PAN suddenly switched and refused to back the cuts in the transfers which would have produced reductions in the Distrito Federal's budget. The gossip in Mexico City is that López Obrador threatened the government by saying that if his budget were cut he would portray himself as a victim of the government's economic mismanagement.
There were also some last-minute squabbles over how the road-building budget should be allocated. Priístas from Durango and Sinaloa claimed that the federal road-building projects were biased towards states such as Tabasco, Nuevo León and Oaxaca. These three states are run by supporters of the PRI leader, Roberto Madrazo. The PRI in both Durango and Sinaloa is less keen on Madrazo; several PRI deputies from these states support Elba Esther Gordillo, the deposed leader of the PRI in the lower chamber of congress.
The Gordillistas had wanted the PRI to back the government's plan for a fiscal reform as part of the budget. This was rejected by Madrazo, who then engineered a vote of no-confidence in Gordillo by the PRI deputies. She was replaced as the PRI leader in the lower chamber by Emilio Chuayffet. The Gordillistas still argue that the PRI was wrong to block the government's fiscal reform.
The core of the proposed reforms was a cut in income-tax rates and an extension of value-added tax (VAT) to food and medicine. Roberto Campa, a prominent Gordillista, said over the New Year that, because there had been no fiscal reform, congress did not have the resources to make a difference through the budget. All we are doing, he said, is sharing out misery. We're not, he added, allocating resources which will lead to economic recovery and the creation of more jobs. The government's proposed fiscal reform would have provided the government with an extra M$90bn (US$8bn) to spend in 2004.
The big problem with the tax structure in Mexico is that taxes amount to only 12% of GDP. The state-owned oil company, Petróleos Mexicanos, provides the government with a third of its revenues, but otherwise 5m Mexicans pay the bulk of the rest of the income taxes. Special interest groups such as unionised workers get benefits (such as no tax on overtime).
One significant but last-minute change to the budget was the dropping of the commitment to privatise, close or merge 18 state companies. These included the national news agency Notimex, the state-owned bits of the film industry, and the national lottery. Instead, congress stipulated that each government ministry should be restructured so that there was less duplication: in particular, it ruled that no ministry could have more than three deputy ministers.
The only substantial change that the lower chamber of congress made to the government's proposals for the revenue side of the budget (Ley de Ingresos) was to increase the forecast for income tax revenues by M$10.9bn (US$964m). The other (attempted) changes made to the revenue side of the budget were to impose a 20% surtax on the price of cigarettes and to exempt telephone services from the Impuesto Especial sobre Producción y Servicios. Congressmen argued that the budget they had passed was robust and would not lead to extra borrowing. Indeed, congress cut the authorised borrowing limit for 2004 by US$1.3bn, to US$7.46bn net.