Nov. 1 (Bloomberg) -- Mexican lawmakers approved the income portion of the 2010 budget legislation and measures to boost tax collection aimed at strengthening public revenue amid a recession and declining oil production.

The lower house of congress gave final approval to legislation passed by the Senate to increase the sales tax to 16 percent from 15 percent. Legislators also approved an increase in the income tax, a higher duty on cash deposits, and a new telecommunications tax.

Mexican President Felipe Calderon has pledged to strengthen public finances as oil production declines. The passage of a bill that boosts tax revenue may be enough for Mexico to avoid a reduction in its credit rating, said Paulo Leme, chief Latin America economist at Goldman Sachs Group Inc.

“The effort warrants not changing the rating and keeping it on negative outlook,” Leme said in a telephone interview.

Lawmakers must approve the spending portion of the 2010 budget by Nov. 15.

Mexico, which in 2000 became the second country in Latin America after Chile to earn an investment-grade rating, has a negative outlook from both Standard & Poor’s and Fitch Ratings, who rate the nation’s debt BBB+.

The rating companies say they may downgrade Mexico should the government fail to contain the deficit. Moody’s Investors Service rates Mexican debt Baa1, also three levels above junk.

Budget Deficit

While the budget proposal Calderon submitted to congress in September called for a deficit of 0.5 percent of gross domestic product excluding investment by state-owned oil company Petroleos Mexicanos, known as Pemex, the version passed today calls for a gap of 0.75 percent of GDP excluding Pemex investment.

The government’s proposed 2010 budget had projected a 2010 deficit, including Pemex investment, of 2.5 percent of GDP, from 2.1 percent this year.

The bill passed today also increases estimated revenue by raising the forecast for next year’s average oil price to $59 a barrel from $53.90 a barrel in the original bill. The budget calls for total revenue of 3.18 trillion pesos ($241 billion).

The measure to raise the income tax for high-earning individuals as well as corporations would increase the rate to as high as 30 percent in 2010 to 2012, before dropping to 29 percent in 2013 and returning to 28 percent in 2014.

Lawmakers approved Calderon’s proposal to tax all cash deposits of at least 15,000 pesos at a rate of 3 percent. The tax is now 2 percent and only applies to deposits exceeding 25,000 pesos.

Deferred Taxes

Congress also approved a measure that would force companies to pay taxes deferred under a program known as “fiscal consolidation,” which allows holding firms to postpone paying taxes if their subsidiaries post losses.

Mexico’s dollar bonds lost 2 percent this month, their biggest monthly declines since January, on speculation the government will fail to cut the budget gap enough to avoid a downgrade. The decline compares with a drop of 0.5 percent for JPMorgan Chase & Co.’s benchmark emerging-market index.

Credit-default swaps, contracts investors use to protect against non-payment, show Mexico trading as high-yield, or junk -- placing it three levels below the nation’s BBB+ grade from S&P and Fitch.

Falling Revenue

Government revenue tumbled this year as the recession reduced exports and tax collection, while output of oil, which funds about 38 percent of the budget, slumped. Production by Pemex in September declined 4.5 percent from a year earlier to 2.599 million barrels a day.

Output at Pemex fell last year at the fastest rate since 1942, costing Mexico 300 billion pesos in lost revenue, according to Finance Minister Agustin Carstens.

The government’s total non-oil revenue, including sales and income tax, fell 13 percent in the first nine months of 2009 compared with the same period last year, according to the Finance Ministry.

Mexico’s $1.09 trillion economy shrank 10.3 percent in the second quarter and will contract as much as 7.5 percent this year, the most since the 1930s, according to the central bank.

-- With assistance by Adriana Lopez Caraveo in Mexico City. Editors: Andrew Barden, John Kohut.

To contact the reporter on this story: Jens Erik Gould in Mexico City at jgould9@bloomberg.net; Adriana Lopez Caraveo in Mexico City at adrianalopez@bloomberg.net; Andres R. Martinez in Mexico City at amartinez28@bloomberg.net

Last Updated: November 1, 2009 07:35 EST