Nov. 5 (Bloomberg) -- Mexico’s 2010 budget and tax increases are weaker than proposed by President Felipe Calderon and represent a “lost opportunity” to shore up public finances, Standard & Poor’s analyst Lisa Schineller said.

“What has passed in the lower house and in the Senate is a weaker version of what the government proposed initially,” Schineller said in a telephone interview from New York. “In some ways, it is a lost opportunity to really take a first step to broaden the tax base.”

The country still faces “medium-term fiscal challenges,” she said. S&P and Fitch Ratings both have Mexico’s BBB+ rating, which is three levels above junk, on negative outlook as the government attempts to increase tax collection to offset the drop in oil production and contain the budget deficit.

Mexico’s government revenue tumbled this year as oil output, which funds about 38 percent of the budget, slumped. Oil production declined 4.5 percent in September from a year earlier to 2.599 million barrels a day.

Mexico’s Congress approved a 1 percent rise in the value- added tax beginning next year, while blocking the creation of a new 2 percent consumption tax. The original proposal to increase the telecommunications tax to 4 percent was reduced to 3 percent and excludes Internet service.

“The VAT in Mexico is a very politically difficult topic,” Schineller said. The 2 percent consumption tax “would really be a step toward broadening the tax base, which is very narrow. They could not get the political backing to do that.”

‘Good Mix’

Mexican Finance Minister Agustin Carstens said the country’s budget has a “good mix” of spending cuts and revenue increases.

“The effort made has been very significant, and that has to be taken into account by the rating agencies when they make their decision,” Carstens said today at the Bloomberg Economic Forum in Mexico City.

S&P wants to see the “full picture” of Mexico’s 2010 budget once the spending portion is approved by Nov. 15, Schineller said.

“We still don’t have the details on the spending side of the budget,” Schineller said. “We don’t have the full picture in terms of what we need, on our side. ”

Schineller also said Mexico’s economy has “touched bottom.”

“In the third quarter, you’ve seen signs of recovery across the board,” Schineller said. “You’ve seen a strengthening as we expected in the third quarter, coming of a very weak second quarter.”

To contact the reporter on this story: Fabiola Moura in New York at fdemoura@bloomberg.net

Last Updated: November 5, 2009 14:32 EST