| | |  Business News | July 2009 
Mexico’s PRI Opposes Tax Increase to Bolster Finances
 Adriana Lopez Caraveo & Jose Enrique Arrioja - Bloomberg
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July 17, 2009
 |  | Gross domestic product may shrink this year at a pace similar to the contraction during the 1995 peso crisis, when it fell 6.2 percent.
Finance Minister Agustin Carstens |  | | |
Mexico’s opposition Institutional Revolutionary Party opposes raising taxes as a way to strengthen public finances, signaling President Felipe Calderon may not get the changes to fiscal policy he wants to avoid a credit-rating cut.
Lawmakers from the PRI, which won elections July 5 to become the largest party in the lower house of Congress, said increasing taxes would hurt the poor during a recession. The government may propose higher taxes as part of a bill aimed at strengthening public finances that it plans to submit in September, Finance Minister Agustin Carstens said this month.
“Taxes can cause an economic setback rather than being a spark” for growth, Cesar Duarte, head of the lower house, said in an interview. He said the PRI will propose fiscal changes that aim to stimulate investment, employment and improvements to infrastructure. He didn’t offer details about the proposal.
Standard and Poor’s cut the outlook on Mexico’s foreign debt to negative from stable in May citing greater “fiscal vulnerabilities” because of the government’s failure to raise taxes and ease its dependence on oil income. A fiscal reform that doesn’t boost levies would probably lead to a downgrade, said Gabriel Casillas, an economist at UBS AG in Mexico City.
“It’s a gloomy scenario for Mexico,” said Casillas, who is UBS’s chief economist for Mexico and Chile. “The easiest way to avoid a downgrade is just raising taxes.”
The prospect that Mexican legislators can increase taxes, broaden the tax base, or tax food and medicine has become “more challenging” after Calderon’s National Action Party lost its status as the biggest in the lower house, Morgan Stanley said this week.
‘Unsustainable Deficits’
Mexico’s fiscal accounts may be heading toward “unsustainable deficits” as a decline in oil production cuts government revenue, Morgan Stanley analysts Luis Arcentales and Daniel Volberg said. The country may need to curb spending growth to keep the deficit in check should the government fail to push through changes to tax laws that buoy revenue, it said.
Calderon’s National Action Party, or PAN, took 28 percent of the votes in the July 5 election to renew all 500 lower house seats while the PRI won 37 percent of the vote. The PAN has 41 percent of lower house seats and the PRI has 21 percent in the outgoing congress.
Central bank Governor Guillermo Ortiz said July 8 that economic reforms, including changes to fiscal policy to boost tax revenue, were “urgent,” particularly as the country’s credit ratings is at risk.
PRI Proposal
“It’s not the time to resolve this by raising taxes for the poorest people,” Carlos Lozano de la Torre, a PRI senator, said in an interview. “Many other things need to be done first.”
Lozano urged Calderon to make changes to his cabinet in order to better mitigate the impact of the recession. He called for changes in the Economy, Agriculture and Labor ministries, and also urged a replacement for Jesus Reyes Heroles, chief executive officer of state-owned Petroleos Mexicanos.
Latin America’s second-biggest economy shrank the most in 14 years in the first quarter, hurt by the impact of the global crisis. Gross domestic product may shrink this year at a pace similar to the contraction during the 1995 peso crisis, when it fell 6.2 percent, Carstens said this month.
The fiscal outlook in Mexico is “challenging,” Lisa Schineller, an analyst at Standard and Poor’s, said this month. The 2010 budget plan that the government sends to Congress in September will be an “important piece of information” that will help determine Mexico’s credit rating, Schineller said.
Manlio Fabio Beltrones, coordinator of the PRI in the Senate, told reporters this week that his party rejects a new tax on food and medicines.
“The people don’t deserve a new sacrifice with an additional tax like an added-value tax in food and medicines,” Beltrones said.
To contact the reporter on this story: Adriana Lopez Caraveo in Mexico City at adrianalopez(at)bloomberg.net; Jose Enrique Arrioja in Mexico City at jarrioja(at)bloomberg.net |
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