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Cablegate: Calderon Sends Mexico's 2008 Budget Proposal To

VZCZCXRO3136
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #4871/01 2531921
ZNR UUUUU ZZH
P 101921Z SEP 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 8812
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUEHC/DEPT OF LABOR WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 MEXICO 004871

SIPDIS

SENSITIVE
SIPDIS

STATE FOR A/S SHANNON
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, AND DRL/AWH
STATE FOR EB/ESC MCMANUS AND IZZO
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD
USDOC FOR ITS/TD/ENERGY DIVISION
TREASURY FOR IA (ALICE FAIBISHENKO)
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND ALOCKWOOD
NSC FOR RICHARD MILES, DAN FISK
STATE PASS TO USTR (EISSENSTAT/MELLE)
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA)

E.O. 12958: N/A
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: CALDERON SENDS MEXICO'S 2008 BUDGET PROPOSAL TO
CONGRESS

-------
Summary
-------

1. (U) President Calderon presented his 2008 federal budget
proposal to the Chamber of Deputies on September 8, 2007.
The $220-billion spending plan is based on assumptions of
3.5% real GDP growth, inflation of 3.0%, a Mexican oil mix
price of USD 46.60 a barrel, and an average nominal exchange
rate of 11.3 pesos to the dollar. The proposal does not
incorporate a tax reform package currently being considered
in Congress, but if the initiative passes as expected, the
government can amend the budget to reflect an estimated USD
10.6 billion (1.1% of GDP) in additional revenue. The
government has said it will spend the additional USD 10.6
billion on infrastructure and social projects.

-----------------------------------
Fiscal Reform Missed First Deadline
-----------------------------------

2. (U) President Felipe Calderon submitted his government's
2008 federal budget proposal to the Chamber of Deputies
(lower house) on September 8. The budget proposal does not
include additional revenue from a pending tax reform that the
administration had hoped to pass before the budget draft was
due to Congress. Talks over the tax initiative stalled last
week because of an impasse over an electoral reform bill,
which the opposition insists be approved in tandem with
fiscal reform. Lawmakers have said they will resume debate
on fiscal reform this week. If the initiative passes as
expected, the government can amend the budget to reflect the
increase in revenue.

-------------------
The Budget Proposal
-------------------

3. (U) In the spending plan, net expenditures total USD 220
billion (2.39 trillion pesos) -- up 3.3% from the approved
2007 budget but down 1.1% in real terms from an estimate of
2007 spending. Proposed programmable expenditures are USD
163 billion, up 3.4% from the 2007 budget in real terms. The
budget assumes the following for 2008: real GDP growth of
3.5%, an average consumer price inflation rate of 3.0%, an
average nominal exchange rate of 11.3 pesos per dollar, a
current account deficit of 1.0% of GDP, and an average price
of the Mexican crude oil basket of USD 46.60 per barrel
($3.80 a barrel above the 2007 approved budget). The plan is
based on oil production and exports of 3.1 and 1.7 million
barrels per day, respectively. Budget calculations assume
that the U.S. economy grows 2.8% and that U.S. industrial
production expands by 3.1% in real terms next year.

4. (U) The budget is balanced using the narrow definition of
the budget balance, but the broader measure of the budget
balance -- the Public Sector Borrowing Requirement (PSBR) --
is a deficit of 2.0% of GDP (vs. 1.7% in the 2007 budget).
Interestingly, a September 8 press release from the Finance
Secretariat (Hacienda) says tQat the public sector could end

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the 2008 budget year -- which coincides with the calendar
year -- with a deficit because of one-time costs associated
with the pension reform approved earlier this year. The size
of the deficit will be a function of how many workers choose
to switch to individual retirement accounts from the existing
defined-benefits pension system, something that will not be
known until September 2008. The Budget and Fiscal
Responsibility Law requires the budget to be balanced except
in extraordinary situations -- a category the government says
pension reform fits.

5. (U) According to Hacienda, the proposal reflects the

MEXICO 00004871 002 OF 003


objectives outlined in the administration's National
Development Plan. Specifically, it aims to increase the
impact of social spending and foster productivity and
employment, improve public security, encourage infrastructure
development, increase resources designated to environmental
protection, and continue efforts to make government spending
more "austere" and more efficient. When compared to the
approved 2007 budget, spending on public security and law
enforcement, social development, and economic development are
up 8.1%, 2.7%, and 2.6%, respectively, in real terms. Pemex
and the Federal Electricity Commission can expect a real
increase in their budgets of 5.3% and 4.3%, respectively.
The Public Safety Secretariat's budget will increase by
14.6%. The proposal also includes a USD 933-million cut in
the federal government's operational and administrative
costs. These funds will be reallocated to health, science,
technology, and investment. As in the past, the government
expects to reduce net external public debt by at least USD
500 million.

--------------------------------------------- ----
Government Highlights Importance of Fiscal Reform
--------------------------------------------- ----

6. (U) During a press conference over the weekend, Calderon
urged lawmakers to pass the pending fiscal reform bill,
commenting that the current budget is "insufficient" to meet
the needs of the country. He said that additional funds
would be used for infrastructure projects, higher education,
health services, Pemex, and the Federal Electricity
Commission.

7. (U) Hacienda estimates that fiscal reform would generate
US$10.6 billion (1.1% of GDP) in additional revenue -- of
which around 70% would go to the federal government and 30%
to federal entities. According to the September 8 press
release, the passage of fiscal reform would demonstrate
Mexico's ability to improve its competitiveness, lead to more
investment in infrastructure, lower interest rates and
country risk, stimulate private investment, and
boost economic growth from 3.5% to 3.7% next year. Hacienda
said that extra funds could be distributed as shown in Table
1.

Table 1. Distribution of Additional Federal Income From
Fiscal Reform

Category Million USD
-------- -----------
Competitiveness and Job Creation 5,626
Infrastructure 4,943
- Communication and transport 1,512
- Water 750
- Energy 2,681
Reduction of electricity rates 683

Human Development 1,713
Hospital Infrastructure 329
Strengthening IMSS (social security) 375
Support for poorer municipalities 275
Municipal public security 329
Higher education 404

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Comment
-------

8. (SBU) Post's initial impression is that the budget is
austere and well thought out, though it is likely to be
substantially modified. The government's first draft is a
negotiating ploy designed to expedite congressional approval
of fiscal reform. Post maintains that this legislation will

MEXICO 00004871 003 OF 003


be approved in time to be incorporated into the 2008 budget
-- which we understand to be October 20, the deadline for the
lower house to approve the income component of the budget.
The tax package could be passed as early as this week, though
problems with electoral legislation could delay it further.


Visit Mexico City's Classified Web Site at
http://www.state.sgov.gov/p/wha/mexicocity and the North American
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