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Fiscal reform finally approved but
results fall well short of original proposal
On 1 January,
the Mexican Congress finally approved a toned down fiscal reform package
after months of debates in the legislature . The fiscal reform adds
barely half the revenues aimed at in the original reform proposal. The
Fox administration had sent the fiscal reform bill to Congress in April
seeking to broaden the tax base and thus reduce Mexico’s dependence on oil
revenues. Currently, oil related income accounts for a quarter of
government revenue. The timing was right: fiscal authorities had to apply
four budget cuts in 2001 to counter the effects of continued oil price
erosion and to meet the 0.65% of GDP fiscal deficit target. The spending
cuts highlighted the necessity for additional public sector revenues.
Currently, public revenues account for just 11% of GDP, far below the tax
take in OECD countries and even well below the revenue levels in other
Latin American countries. The reform proposal sought to increase the tax
take by 2% of GDP by broadening the tax base. However, the application of
a value added tax on food and medicine proved too controversial to win
over the opposition-dominated Congress. In addition, even members of Fox’
own party, the National Action Party (PAN, Partido Acción Nacional),
voiced concerns and opted for a more popular and less ambitious version of
the reform.
The fiscal package is expected to increase public
sector revenues by 61.6 billion Pesos (US$ 6.4 billion) or close to 1% of
GDP. The main elements of the fiscal package include:
1. Income
tax. The cornerstone of the fiscal reform package is
the standardization of personal and corporate income taxes at a maximum
rate of 35%, which will decline gradually to reach 32% by 2005. The
collection will be simplified by reducing the number of tax brackets in
the income tax structure from ten to eight, declining further to five
brackets in 2005. In addition, the reform simplifies the concepts of
total personal income and eliminates the differentiated treatment
originating from the existence of different tax regimes. Tax collection
efficiency will be increased by replacing the current accrued simplified
tax system applied to primary sectors and transportation, with a cash flow
base tax system. Finally, certain stock market transactions will be
taxed.
2. Excise
Taxes. The fiscal package includes the implementation
of several excise taxes, including a 10% tax on telecommunications
services, excluding basic residential telephone and some other services; a
20% tax on natural and mineral bottled water and on soft drinks not
sweetened with sugar cane. The bill will also increase the tax rate on
cigarettes and cigars and modify the excise tax scheme for alcoholic
beverages.
3. Tax on
luxury goods and services. The tax reform will hike
public revenues by mandating a tax on luxury goods ranging from caviar and
electronic organizers to yachts as well services such as golf, horseback
riding, polo, motor car racing or water sports.
The approval
of a fiscal reform in itself is positive as it demonstrates the capability
of the Fox administration to govern with an opposition-dominated
Congress. However, the actual reform falls well short of the original
proposal and the scope of the reforms approved is disappointing. As a
result, Mexico’s public accounts will remain highly dependent on oil
revenues. In particular, the failure to broaden the tax base and the
measures to compensate for the revenue shortfall have resulted in an even
more complicated tax system, at least temporarily. Industry lobbyists
should find it easy to backpaddle on the reforms as they may argue that
the levies work against investment in telecommunications, pinch soft-drink
makers and put tobacco farmers out of work and will, thus, will not have a
sizeable effect on the revenues.
2002 budget maintains conservative
fiscal stance
Almost simultaneously with the approval of the fiscal
reform package, Congress passed the 2002 budget law. The 2002 budget
maintains the strict 2001 fiscal deficit target of 0.65% of GDP for this
year. Moreover, the 2002 budget is based on conservative premises. It
assumes real annual GDP growth rate of 1.7% (just 0.2 percentage points
below the current Consensus); an inflation rate no higher than 4.5%
(Consensus: 4.9%); a current account deficit of 3.4% of GDP (Consensus:
2.8%); an average nominal interest rate of 9.7% (Consensus year-end:
8.1%); an average price for the Mexican oil basket of 15.5 US$ per barrel
(down from US$ 17 anticipated earlier) and oil exports of 1.725 million of
barrels per day (down 100,000 barrels per day owing to the agreement with
OPEC). As in last year’s budget law, the fiscal program contains
automatic stabilizers that guarantee that the target deficit will be met
in case the economic scenario evolves differently than anticipated.
Consequently, panellists confide in the government not to overshoot the
fiscal deficit target substantially, expecting an imbalance of 0.7% of GDP
in 2002.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Mexico. For more details please click here.
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