Mexican President Enrique Pena Nieto proposed a balanced budget for his first year in office, seeking to offset a 2.3 percent increase in spending with higher tax collection and oil revenue.
The Finance Ministry yesterday asked Congress to approve 3.58 trillion pesos ($279 billion) in spending for next year, which is balanced by revenues when 326 billion pesos of investment in Petroleos Mexicanos is excluded. The government wants to keep the top income tax rate for high-earning individuals and companies at 30 percent rather than allowing a previously-scheduled reduction to 29 percent to take effect, Finance Minister Luis Videgaray told reporters yesterday.
The plan would return the deficit to zero after Congress approved shortfalls in recent years, overriding Mexican law requiring a balanced budget, as the nation sought to recover from the 2009 recession and global financial crisis. The budget, which must be passed by Congress by Dec. 31, calls for increasing total revenue by 150 billion pesos from this year, or 4.4 percent in real terms. That includes a 2 percent boost for revenue from domestic oil sales by state-owned Pemex.
“They are definitely going to preserve healthy public finances,” Gabriel Casillas, chief economist at Grupo Financiero Banorte SAB, said in a telephone interview from Mexico City. With the budget plan and a proposed fiscal reform, “we must see in the next few weeks some credit-ratings agencies either making positive comments about the country or even changing the outlook from stable to positive,” he said after the proposal was submitted to lawmakers.
Pena Nieto’s inauguration on Dec. 1 returned the Institutional Revolutionary Party to power after a 12-year hiatus from seven decades of uninterrupted rule. Erasing the deficit shows his commitment to keeping public finances in check as he seeks to lift economic growth to 6 percent from the 3.8 percent median economist forecast for growth this year, said Mario Correa, chief Mexico economist at Bank of Nova Scotia.
“Stability in and of itself isn’t the objective,” Videgaray said yesterday. “But in order to have economic growth and job creation we need stability, and stability is created through fiscal responsibility.”
Videgaray said Pena Nieto signed yesterday an austerity package that will cut costs in all areas of government, such as 8 billion pesos in the finance and interior ministries. The austerity plan will be published in the nation’s gazette Dec. 10, according to Videgaray.
Mexico’s economy will probably expand 3.5 percent in 2013 with annual inflation averaging 3 percent, in line with the central bank’s target, Videgaray said. Latin America’s second-biggest economy is projected to expand 3.9 percent this year, according to the proposal. The Finance Ministry forecast an exchange rate for next year of 12.9 pesos per U.S. dollar and an average 13.2 pesos per U.S. dollar for this year.
Although the proposal to keep the maximum income tax rate at 30 percent rather than let it drop to 29 percent will bring in around 23 billion pesos in revenue, it will be “very controversial,” said Jose Isabel Trejo, a lawmaker from the opposition National Action Party, or PAN, who heads the lower house’s finance committee.
“You’re hitting all business operations,” Trejo told reporters in Mexico City. “That’s 23 billion pesos in the public coffers, but it’s also 23 billion pesos less in the pockets of individuals.”
Trejo said the proposal also postpones previously approved tax reductions on other items, such as liquor.
On projections for energy revenue, the Finance Ministry estimates oil production will average 2.6 million barrels per day next year, Videgaray said.
Calculations for the budget were made with the assumption Pemex will export 1.183 million barrels a day with an average price of $84.90 per barrel, according to the proposal.
Mexican law prohibits budgetary shortfalls, while allowing for exceptions to be approved by Congress. Lawmakers had originally agreed to eliminate the deficit by 2012 and later approved an extension until 2013. They passed a 2012 budget with a deficit of 0.4 percent of gross domestic product.
The government would post a deficit of 2 percent of GDP when investment in Pemex is included, said Miguel Messmacher, the deputy finance minister for revenue. Pena Nieto has promised legislation to open the oil industry to more private investment as Pemex seeks to reverse seven years of declining crude production.
The nation’s debt to GDP would decline to 37 percent next year from 37.5 percent in 2012 under the budget’s proposal, Messmacher said.