Mexico’s Congress Approves Widest Budget Gap in Four Years

Mexico’s Congress authorized the widest budget gap in four years as President Enrique Pena Nieto seeks to boost growth in Latin America’s second-biggest economy from the slowest pace since the 2009 recession.

The lower house voted today 441 to 26 to approve the 2014 spending plan of the budget, which calls for 4.47 trillion pesos ($342 billion) in outlays. Next year’s budget, which forecasts a deficit of 1.5 percent of gross domestic product, now goes to Pena Nieto for signing. The 2014 gap compares with a 0.4 percent deficit planned by the government for this year.

Pena Nieto’s push for higher deficit spending next year is part of his plan to jump-start the $1.18 trillion economy by ending the state’s 75-year oil monopoly and increasing tax revenue. The budget will help boost spending in critical areas such as infrastructure to revive growth that has lagged the regional average over the past decade, said Benito Berber, a strategist at Nomura Holdings Inc. in New York.

Pena Nieto is trying to “avoid another year of very low growth,” Berber said in an e-mailed response to questions. “This spending will indeed help the economy.”

Mexico’s economy will grow 3.5 percent in 2014 compared with an estimated 1.2 percent this year, according to the median estimate in a Nov. 5 survey by Citigroup Inc.

Budget Deficit

The extra yield investors demand to hold Mexico’s dollar-denominated debt instead of U.S. Treasuries rose three basis points, or 0.03 percentage point, to 215 basis points at 9:43 a.m. in Mexico City since Sept. 8, when Pena Nieto requested authorization to post a budget deficit this year, according to JPMorgan Chase & Co.’s EMBI Global Diversified index. In the same period, Brazil’s extra yield climbed seven basis points to 250 basis points.

The peso weakened 0.2 percent to 13.0408 per U.S. dollar.

Finance Minister Luis Videgaray has pledged to boost public spending by 30 percent in 2014 after a balanced budget approved in December for this year led to spending cuts. The government has since gained congressional approval for a 0.4 percent deficit for this year.

The budget “is part of the goal set by this administration to direct the course of transformation in Mexico to the path of growth, job creation and improved social conditions,” Raymundo King de la Rosa, a lawmaker from Pena Nieto’s Institutional Revolutionary Party, known as the PRI, said in a speech on the lower house floor. Public spending is “the best instrument for reactivating the economy,” he said.

Tax Overhaul

The tax overhaul approved last month to pay for the additional spending was opposed by lawmakers from the National Action Party, the largest opposition group, who said it would hurt the middle class and Mexicans living in the nation’s north. The plan increases the sales tax to 16 percent from 11 percent in states that border the U.S., including traditional strongholds for the party known as PAN.

The lower house approved the 2014 budget today with less spending than the president proposed after lawmakers shaved taxes from his original plan.

On Oct. 31, Congress agreed to increase the top income tax rate to 35 percent and impose an 8 percent levy on junk food. The taxes will help pay for new social programs such as unemployment insurance and pensions for seniors and spur investment in oil by shifting taxes away from the $95 billion industry, according to the government.

Non-Oil Revenue

The tax package will reduce the government’s dependence on oil revenue to about 31 percent of the federal budget from the current 34 percent next year, Miguel Messmacher, the deputy finance minister for revenue, said in a Nov. 1 interview.

Congress reduced new tax revenue projections for next year to 180 billion pesos from Pena Nieto’s proposed 240 billion pesos after eliminating his plan to tax private school tuition and mortgage interest, proposals that ran into opposition from lawmakers in the PAN, the Democratic Revolution Party and the president’s own PRI.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE