MexECON Blog

Upper House OKs 2011 Revenue Bill

The upper house of Mexico's Congress on Tuesday approved a revenue bill for 2011 that had earlier been passed by the lower house.  After a deficit projected to come in at 0.7% of gross domestic product (GDP) in 2010, the bill calls for cutting the deficit to 0.5% of GDP in 2011, which would be much less aggressive than the 0.3% of GDP originally proposed by President Calderón.  To get to their target deficit, the senators accepted the lower house's major economic assumptions, which were generally rosier than in the proposal.  The senators assumed Mexican GDP will grow 3.9% in 2011, versus the 3.8% assumed by Calderón.  They assumed the average export price of Mexican crude oil will be $65.40 per barrel, instead of the originally proposed $63.00 per barrel.  The only significant tax changes were a hike in the cigarette tax and the establishment of a new tax on energy drinks.  The Congress will now turn to preparing a 2011 spending bill before the end of the year.

Comment:  Some observers have frowned on the Congress boosting economic assumptions and the target deficit.  Nevertheless, the revenue bill as a whole does not seem seriously out of line.  If there is criticism to be made of Mexico's current fiscal policy, it is that Mexican politicians still have not been able to implement truly fundamental reforms that would broaden the tax base, raise more revenue, make the tax system fairer and more efficient, and thereby allow the government to put greater resources into public goods such as infrastructure and education.  It is especially instructive that in the midst of a destabilizing war against drug cartels, the government has proposed that the only increase in public security spending in 2011 will come from whatever savings and efficiencies can be found elsewhere in the budget.  The reason is that Mexico's tax system simply does not raise enough revenue to invest even in such a fundamental public good as better policing and an efficient criminal justice system.

Patrick Fearon, CFA
Vice President, Fund Management

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