The slump in the U.S. economy is quickly spilling over to Mexico and most indicators point towards a rapid deceleration in economic growth.  Meanwhile, the government sent an ample fiscal and financial reform package to Congress.  The reform programme is considered the central pillar of President Fox's economic agenda but faces tough resistance in the opposition dominated Congress.

Reform bills sent to Congress.  On 3 April, the government presented an ample reform package (Nueva Hacienda Pública Distributiva) to Congress.  The reform programme is considered the central pillar of President Fox's economic agenda since it would allow the government to boost social spending while reducing the fiscal deficit.  The reform package comprises three areas:

1.  Tax reform.  Tax reform is the centrepiece of the reform package and is seen as crucial to boost the tax take, thus making Mexico less dependent on oil revenues in the future.  Mexico has a notoriously low tax collection record compared to its regional peers.  While Brazil and Chile collect 17.8% and 14.8% of GDP (1998 numbers), Mexican tax collection reaches just 10.7% of GDP.  The tax package aims to streamline collection, by modernizing sales tax collection and by broadening the tax base.  Furthermore, the government plans to bring the personal income tax rate in line with corporate tax rates in order to reduce the incentive for tax dodging.  The maximum tax rate would be lowered from 35% to 32% for corporations and from 40% to 32% for individuals.  The tax reform is considered the most controversial part of the whole reform package, particularly the proposed 15% tax levy on currently exempted items of food, books and medicines.  The reform is considered to have regressive effects since only the top 40% of earners would benefit, while the bottom 20% of the income ladder would receive just 3% of the benefit of the tax exemption.  To offset the additional burden that the new value added tax would place on the nation’s poor, the government plans to exempt the first 50,000 pesos (about US$ 5,300) in earnings from federal income tax and to exempt a basket of basic generic medicines from the value-added tax.

2.  Budgetary reform.  The main objective of the budgetary reform is to modernize the administrative process in order to render budget execution more efficient and transparent.  Among the measures introduced are multi-annual budgeting to allow for a long-term public investment planning; earlier submittal of the budget law to Congress to allow for longer debate; a clause that adopts the previous year’s budget as the base budget for the new year if the legislative should fail to approve a new budget law; and more detailed breakdown in the budget to increase transparency. 

3.  Financial reform.  With the financial reform package the government plans to strengthen the financial system and to increase the institutional supervisory capabilities.  The proposal includes reforms for commercial banks, such as stricter information requirements and adapting prudential regulation in accordance with international standards.  Reforms to state development banks seek to increase flows to productive entities by increasing autonomy and by adapting regulatory frameworks to those of commercial banks.  The reform bill also affects the stock market, with proposed measures including new minority shareholder protection, easier access to capital markets for companies and the possibility of higher institutional investor participation in stock markets.

Reforms face tough opposition.  The government plans to push the reforms through Congress during the current session that ends on 30 April though that may be to tight given that the Easter break reduces the time for debate.  The bill is highly controversial and is likely to face tough opposition in Congress, where the government lacks a majority.  Fox's own conservative party, the National Action Party (PAN), is expected to back the reform despite their recent disapproval of Fox’s support of Indian Zapatista rebels addressing Congress.  However, the leftist Party of the Democratic Revolution (PRD) has already rejected the proposal.  As a result, the centrist Party of Institutional Revolution (PRI) will hold the balance of power. In the past, PAN and the PRI have aligned on budget votes and President Fox is hoping to lure enough PRI support to get the necessary votes in the legislature.  In order to rally public support for the reform, the President gave a televised speech on 2 April urging Mexicans to back the package.

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