MexECON Blog

Lower House OKs 2011 Revenue Bill

According to press reports, the lower house of Mexico's Congress on Wednesday approved its 2011 revenue bill.  Under the bill, Mexico's budgeted revenues in 2011 will be 3.439 billion pesos, modestly higher than President Calderón's original proposal.  The increase in revenues came in part from boosting Mexico's assumed economic growth next year to 3.9%, versus the original assumption of 3.8%.  In addition, the legislators assumed the average export price for Mexican crude oil would be $65.40 per barrel, instead of the original $63.00.  They also raised cigarette taxes and imposed a new tax on energy drinks.  In addition to boosting assumed revenues, the legislators decided to cut the budget deficit only modestly, from 0.7% of gross domestic product in 2010 to 0.5% in 2011.  In the budget proposal, President Calderón had called for cutting the deficit aggressively to just 0.3% of gross domestic product.  Administration officials said they acquiesced in the increased revenue assumptions and higher deficit in order to avoid opposition demands to cut the country's value added tax.  The revenue bill must now be approved by the upper house.  After that, both houses of Congress will have to approve a spending bill.

Comment:  President Calderón's National Action Party does not have control of the Congress, so some horsetrading on the 2011 budget was inevitable.  The increased assumptions for economic growth and oil prices show the legislators are open to using rosy scenarios to make room for higher spending.  The outright boost in the assumed deficit also points to some slippage in fiscal discipline.  Nevertheless, the resulting revenue bill was not at all out of bounds.  The new economic growth assumption is consistent with the International Monetary Fund's latest forecast of 3.9%, and the new assumption for oil prices is significantly lower than the current range of futures prices for 2011, which all fall between $81.00 and $86.00 per barrel.  The assumed budget deficit is also quite low in comparison with the current huge deficits in the United States and other developed countries.  Officials in Calderón's administration declared themselves satisfied with the result, and in a sign that foreign investors were taking the bill in stride, the peso closed little changed both Wednesday and Thursday.  Mexico remains quite fiscally disciplined, and that is continuing to create positive conditions for its current economic rebound. 

Patrick Fearon, CFA
Vice President, Fund Management

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