Mexico faces huge revenue gap, tax overhaul planned

By Reuters Staff
July 24, 2009

Mexican Finance Minister Agustin CarstensBy Jason Lange
MEXICO CITY, July 23 (Reuters) – Mexico will have to cut
spending and raid its rainy day savings to cover a 480 billion
peso ($36.6 billion) hole blown in government revenues by the
recession, Finance Minister Agustin Carstens said on Thursday.
The revenue shortfall underscores the severity of
Mexico’s deep economic recession, which could be the country’s
worst downturn since since the Great Depression.
“This could be the biggest single-year decline in
government revenues in history,” Carstens told a news
conference.

Despite the budget crunch, Carstens said he would propose a
tax reform package to boost the government’s non-oil revenues
when he sends the proposed 2010 budget to Congress.

Bond rating agencies have warned that Mexico’s credit
rating could be downgraded due to excessive reliance on the
country’s slumping oil industry for revenues and puny non-oil
tax collections.

Carstens said the finance ministry was still working on
specific proposals for tax reform, though he later added in a
radio interview that the plan would include “additional taxes.”

Mexico’s economy has been hammered by a slump in U.S.
demand for its exports like cars and refrigerators as
recession-hit U.S. consumers put off big purchases. The
government plans to run a budget deficit of about 2 percent of
gross domestic product this year to help fight the downturn.

Mexico became one of the world’s leading exporters after
entering the North America Free Trade Agreement with the United
States and Canada in 1994.

But its extensive trade relationship with the United
States, which buys about 80 percent of its exports, has turned
Mexico into the big Latin American country hardest hit by the
U.S. recession.

SPENDING CUTS

Carstens said at the news conference that the government
would commit to eliminating its budget deficit by 2012.

Carstens recently suggested he favored relaxing Mexico’s fiscal
responsibility laws to allow the government to tie its budget
to the economic cycle.

To tackle the current budget shortfall, the government will
cut a further 50 billion pesos ($3.8 billion) in discretionary
spending on top of a 35 billion peso ($2.6 billion) reduction
announced in May.

It also plans to tap its rainy day savings funds for
another 92.4 billion pesos ($7 billion) and expects to earn 100
billion pesos ($7.6 billion) from hedges on oil revenues.

The rest of the revenue shortfall will be covered with
central bank exchange profits, reductions in non-discretionary
government outlays and unspecified nonrecurring income, the
finance ministry said in a statement.
($1=13.22 Mexican pesos)

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