MexECON Blog

Congress Considers 2011 Budget

On Monday, the Mexican Congress began considering President Calderón's proposed budget for 2011.  Since release of the proposal earlier this month, Economy Minister Ernesto Cordero has stressed that the budget is austere and responsible.  The proposed budget assumes no increase in tax rates, though the rebounding economy is expected to boost tax collections.  The proposal also keeps spending equal to the levels reached in 2010.  However, expected savings in administrative costs are to be channeled into higher spending on priorities such as public security, education, and infrastructure.  Importantly, the budget proposal assumes a deficit equal to just 0.3% of gross domestic product (GDP), down from this year's expected deficit of 0.7% of GDP.

Since the budget proposal was released, the opposition Institutional Revolutionary Party (PRI) has called for reducing the value-added tax from the current 16.0% to 15.0% in order to provide additional stimulus to the economy.  Press reports today say the ruling National Action Party (PAN) has agreed to discuss the idea.  However, the administration has pushed back firmly, arguing that any slippage in Mexico's fiscal discipline runs the risk that international bond rating firms could downgrade Mexico's debt.  In a sign that the argument is sticking, the PRI's leader in the senate has given assurances that his party still supports reducing the deficit to the government's proposed 0.3% of GDP.

Comment:  Because the PAN does not have control of Congress, the PRI's proposal to cut the value-added tax bears watching.  Any cut in the tax could be potentially destabilizing because the tax was only raised this year to make up for falling oil revenues.  A tax cut could provide some additional stimulus to the economy, but the economy is already booming, and cutting the tax would  be risky in an environment where global investors are hyper-sensitive to every government's fiscal discipline.  As has been noted often in this blog, Mexico's government has done an exemplary job of living within its modest financial means over the last decade, and its discipline has probably helped boost its attractiveness as an investment destination and has probably given a lift to the peso.  It is encouraging that Mexican policymakers appear to recognize that fact, even to the point where the PRI is taking pains to assure that it wants to slash the small deficit in 2011, just as the government does.

Patrick Fearon, CFA
Vice President, Fund Management

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