Nov. 3 (Bloomberg) -- Mexico’s budget bill is a “Band- Aid” solution that won’t contribute to long-term economic growth and competitiveness, former President Vicente Fox said.

Mexico’s Congress on Nov. 1 passed a watered-down version of President Felipe Calderon’s 2010 budget that Fox says is not enough to reverse a “desperate” budget situation brought on by falling oil revenue, which funds 38 percent of spending.

“Once again we lost the opportunity to implement the reforms Mexico needs to be on the path of sustainable development,” Fox, a member of President Felipe Calderon’s National Action Party, told reporters today in Washington.

Mexico is trying to avoid a credit rating cut as a drop in oil production swells a deficit Calderon said on Sept. 8 would reach 2.5 percent of gross domestic product next year including investment by state-owned Petroleos Mexicanos, known as Pemex. This year the government’s projected deficit is 2.1 percent of GDP.

Standard & Poor’s and Fitch Ratings have said they may downgrade Mexico should the government fail to offset the drop in oil production. Mexico in 2000 became the second country in Latin America after Chile to earn an investment-grade rating.

‘Incomplete, Partial’

Lawmakers on Nov. 1 voted to increase the sales tax to 16 percent from 15 percent instead of adopting the administration’s 2 percent consumption tax proposal, which would have generated more than double the revenue, according to the government.

They also raised the income tax for wealthier individuals as well as corporations to as high as 30 percent in 2010 to 2012, before dropping to 29 percent in 2013 and returning to 28 percent in 2014.

Fox, 67, said changes were “incomplete and partial.” To widen the tax base while encouraging investment, the former Coca-Cola Co. executive said Mexico needs a generalized sales tax of 15 percent, without exemptions, and must reduce the income tax rate to the same level.

“If we continue denying Mexico the solutions it needs and implement Band-Aid solutions instead, small changes, we’re not going to get ahead,” he said. The tax changes approved by congress “only serve to partially plug holes.”

Fox took power in 2000 and saw his efforts to overhaul Mexico’s tax system blocked by the Institutional Revolutionary Party, or PRI, which claimed taxes on food and medicine would punish the poor.

Then as now, Congress approved a weakened version of the government’s bill. Fox never patched up his relationship with lawmakers and failed to pass major reform laws during his six- year term.

Mexico’s $1.09 trillion economy, the second biggest in Latin America, was the second-worst performer among the world’s largest 50 economies in the second quarter. It shrank 10.3 percent in that period.

To contact the reporters on this story: Joshua Goodman in Rio de Janeiro at jgoodman19@bloomberg.net

Last Updated: November 3, 2009 15:16 EST