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Cablegate: Calderon Submits 2009 Budget to Congress; Spending On

VZCZCXRO0110
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #2764/01 2542226
ZNR UUUUU ZZH
P 102226Z SEP 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 3243
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/CDR USNORTHCOM
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHEHAAA/NSC WASHINGTON DC

UNCLAS SECTION 01 OF 03 MEXICO 002764

SENSITIVE, SIPDIS

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 (RACHEL JARPE, ANNA JEWEL)
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH, ALOCKWOOD, GWARD
NSC FOR DAN FISK
STATE PASS TO USTR (EISSENSTAT/MELLE)
STATE PASS TO FEDERAL RESERVE (ANDREA RAFFO)

E.O. 12958: N/A
TAGS: ECON EFIN PINR ENRG PGOV MX
SUBJECT: CALDERON SUBMITS 2009 BUDGET TO CONGRESS; SPENDING ON
SECURITY AND SOCIAL PROGRAMS ARE UP

Summary
-------

1. (U) With oil revenues down, President Calderon submitted a 2009
federal budget proposal that increases spending on security and
social programs. The proposed budget, presented to the Chamber of
Deputies on Sept. 8, rose by 5.7 percent in real terms over the
budget approved in 2008. Spending for security and social
development programs, Calderon's top priorities, significantly rose
by 33 and 6 percent respectively. With oil output and revenue
declining, the government is cutting gasoline subsidies gradually.
The budget proposal does not yet incorporate the energy reform
currently being discussed in the Congress. For the first time in 15
years, the budget does not include changes to the tax system. A
major challenge for the administration will be to improve its timely
execution of expenditures in 2009, especially those for
infrastructure. End summary.

Economic outlook for 2009; decline in oil output noted
--------------------------------------------- ---------

2. (U) Calderon's 2009 budget is based on assumptions of 3 percent
real GDP growth, annual inflation of 3.8 percent, with an average 28
day-CETES rate of 8 percent, a current account deficit of 1.1
percent of GDP, and a Mexican oil mix price of $ 80.3 per barrel as
determined by a formula set in the Budget and Fiscal Responsibility
Law enacted in 2006 (Note: The Finance Secretariat is expecting an
average Mexican oil mix price of $ 96.50 per barrel in 2009. End
Note). A decline of 3.8 and 8.6 percent in oil production and
exports are expected for 2009 to total 2.75 million and 1.33 million
barrels a day, respectively, largely due to the drop in Cantarell
field's output. The Finance Secretariat (Hacienda) explains that
the decline in Cantarell's production will be partially offset by
the expected output increase in other fields, such as
Ku-Maloob-Zaap.

Budget proposal is balanced
---------------------------

3. (U) Consistent with the Budget and Fiscal Responsibility Law, the
Executive sent a balanced budget, which includes the revenue and
spending bills. Expenditures and revenue total 2.82 trillion pesos
(US$ 269 billion), a 5.7 percent increase over the budget approved
in 2008, but only 0.4 percent higher than the estimated budget to be
actually exercised in 2008 (US$ 268 billion). Proposed programmable
expenditures are 2.11 trillion pesos (US$ 202 billion), up 6.3
percent from 2008 in real terms and the highest ever approved in
Mexico's history.

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), which includes
off-budget items, such as the banking and highway bailouts - will be
equivalent of 2 percent of GDP. The historical balance of the
Public Sector's Borrowing Requirements (HBBR) will be equivalent to
30.5 percent of GDP. (Note: HBBR is the public sector's net total
debt measured by the net stock of liabilities that result from
subtracting total available financial assets from total liabilities.
End Note) The 2009 budget proposal considers a results-based
budgeting process, as well as performance evaluations and compliance
measurements of government programs' goals. For the first time
ever, Calderon is proposing multi-annual investment budgets for
infrastructure projects aimed at propelling the National
Infrastructure Plan (NIP).

Top priorities are security and social development
--------------------------------------------- -----

5. (U) The public spending strategy for 2009 will focus on security
and justice, and social development, health and education. The 2009
budget includes more funds for overall expenditures for security and
justice to fight organized crime and kidnapping, and social
development to tackle poverty. Overall expenditures for security
and justice will grow by 32.9 percent in annual terms. Spending in

MEXICO 00002764 002 OF 003


social development programs will rise 6 percent in annual terms.

6.(U) The 2009 budget for the Public Security Secretariat, the
Attorney General's Office, the National Defense Secretariat and the
Secretariat of the Interior will be increased by 49.8, 29.2, 16.1
and 25.1 percent in real terms, respectively. The Social
Development Secretariat will see its budget grow by 25.9 percent in
annual terms and the National Council of Science and Technology's
budget will register an increase of 24.7 percent. On the other
hand, budgetary resources for the Secretariats of Communications and
Transportation, Agriculture, Tourism and Environment will be reduced
by 19.9, 9.4, 4 and 2.5 percent, respectively.

No tax changes in 2009
----------------------

7. (U) For the first time in 15 years, the 2009 budget will not
include changes to the tax system or "Miscelanea Fiscal" as it's
known in Mexico, because the government is still implementing the
changes approved in last year's fiscal reform package. Under this
reform, for instance, the single corporate tax rate (IETU) will
increase from 16.5 percent in 2008 to 17 percent in 2009. Also,
collections from the tax on cash bank deposits implemented in July
are expected to grow by 147.4 percent. Moreover, the Tax
Administration Service (SAT, the rough equivalent of the IRS) will
continue simplifying the system to make it easier for taxpayers to
fulfill their obligations, as well as implement tools to tackle tax
evasion.

Proposed energy reform not factored into budget
--------------------------------------------- --

8. (U) The economic package does not yet include any changes related
to the energy reform currently being discussed by the Congress.
Once Congress approves the reform, legislators will have to
incorporate the changes to the revenue bill. The energy reform is
expected to be approved before October 20, when the Chamber of
Deputies must approve the revenue bill. The Senate must approve it
no later than October 31. The spending part of the package must be
approved by the Chamber of Deputies no later than November 15.

Infrastructure budget and off-budget resources
--------------------------------------------- -

9. (U) It is worth noting the 19.9 percent reduction in the
Secretariat of Communications and Transportation's (SCT) budget this
year, which is partially explained by the significant resources SCT
has received in the past and the additional resources it is expected
to obtain from the launch of pending highway bids. The government
will also be able to execute multi-annual budgets for projects
included in the National Infrastructure Plan. The government's goal
is to invest the equivalent of 5 percent of GDP in the coming years,
which is expected to be accomplished via budget resources: direct
allotments and long-debt investment instruments Pidiregas, and
off-budget resources. The Secretariat of Communication and
Transportation has also embarked on a major investment plan that
involves public-private partnerships included in the National
Infrastructure Plan (NIP).

Comment
-------

10. (SBU) To some extent, the 2009 budget is more austere than in
other years given the expected decline in oil output, crude oil
price and increasingly expensive gasoline imports. As a result, the
government has announced its intention to gradually cut gasoline
subsidies in half by 2010. The increase in public security and
social development is fully consistent with Calderon's public pledge
of fighting narco-trafficking and organized crime, and of tackling
Mexico's stubborn poverty rate.

11. (SBU) A major challenge for the administration will be to
improve the timely execution of expenditures, especially those for
infrastructure. For the past two years, the federal government has

MEXICO 00002764 003 OF 003


found this difficult due to a poor of planning, bureaucratic
procedures, and delays in signing execution agreements with local
governments for the use of federal resources and land. We expect
Congress to likely perform some surgery on Calderon's budget to
funnel more resources to highway infrastructure, support payments to
the agricultural sector, and a reduction of social development
funds. End Comment.

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