The Battle For Mexico, Round One

The budget fracas is a key test of the opposition's new power

Braving hours of crosstown traffic, pin-striped technocrats are shuttling between the Finance Secretariat and Mexico's newest power center, the National Congress. Armed with computerized slide shows and reams of printouts, they are trying to persuade a skeptical Chamber of Deputies to approve without costly amendments the $100 billion budget that President Ernesto Zedillo Ponce de Leon will submit on Nov. 11. After seven decades of legislative rubber-stamping of presidential initiatives, Mexico's executive branch finds itself for the first time lobbying a Congress led by opposition parties, which won control of the lower chamber last July.

Mexico's continued economic recovery may be riding on the outcome. Proposals for stepped-up social spending by the center-left Party of the Democratic Revolution (PRD) and for tax cuts by the center-right National Action Party (PAN) could tilt the 1998 budget sharply into deficit. That could again undermine the peso and rekindle investor worries about Mexico following the recent global market upheaval. "A bigger deficit could lead to another [financial] crisis, and the PRD's economic proposals would only lead to short-lived growth in the best of scenarios," says Raymundo Winkler, director of the Center of Economic Studies of the Private Sector.

SENDING A "MESSAGE." The budget tussle is the latest bout in the political transformation under way in Mexico as the power of Zedillo's long-ruling Institutional Revolutionary Party (PRI) wanes. Loss of control over the budget-approval process spells the end of Mexico's traditional top-down economy. "We plan to assert ourselves, and the budget is the first big issue we're tackling," says PRD congressman Pablo Gomez.

While both the Senate and Chamber of Deputies must approve tax policy, the Chamber alone is empowered to approve or amend the budget. Unlike the U.S. President, Zedillo has no budget veto. "Congress is determined to send a message to the executive branch saying: `We're the ones who are going to decide what economic policy is and how big the fiscal deficit is going to be, and not you,"' says economic consultant Jonathan E. Heath. Observers expect quite a bit of noise, if not outright legislative gridlock. While the PAN wants to lower the 15% value-added tax as a stimulus to business, the PRD advocates more social spending and elimination of taxes on basic consumer goods to make the tax system more progressive.

Such proposals conflict with Zedillo's aim of holding down the budget deficit. To help pay for the government's contribution to a new privatized pension system and a costly rescue of battered banks, he's proposing a deficit equal to 1.25% of gross domestic product in 1998, compared with 0.5% this year. But PAN tax-cutters argue that a deficit of 1.5% of GDP is manageable, while the PRD says a 3% deficit is necessary to boost social spending. Finance Secretary Guillermo Ortiz Martinez says common sense must prevail. "I don't think any political party wants to be viewed as fiscally irresponsible," Ortiz said in an interview with BUSINESS WEEK. "I think there is a growing consensus that we cannot embark on that kind of [deficit spending] adventure again."

A compromise is likely. But to avoid a budget impasse that would paralyze spending as 1998 begins, legislators must reach agreement by the time Congress adjourns on Dec. 15. Even if Zedillo manages to keep the deficit down, the opposition will scrutinize the budget line by line. One big category that's likely to be slashed from its current level of $5 billion is a loosely managed fund known as Section 23, which covers natural disasters and other unexpected expenses. It includes a $26 million discretionary presidential fund for which the President does not have to account to anyone. The PRD's Gomez, author of a recent book, The President's Secret Expenditures, says "there is no way this Congress is going to approve any secret expenditures."

In their face-off with Zedillo, though, legislators are handicapped by the lack of a counterpart to Washington's Congressional Budget Office. The PRD has proposed creating a nonpartisan advisory office in time to analyze the 1999 budget. While the budget battle is just the first of a series of challenges that the opposition plans against entrenched PRI rule, it is a crucial one. How it is resolved will set the tone for Mexico's new political era.

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