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Cablegate: 2010 Gom Budget: Opposition Rejects and Business

VZCZCXRO3796
RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #3010/01 2921858
ZNR UUUUU ZZH
R 191858Z OCT 09
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 8659
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC

UNCLAS SECTION 01 OF 03 MEXICO 003010

SENSITIVE
SIPDIS

STATE FOR WHA/MEX, WHA/EPSC, EEB
NSC FOR RESTREPO, FROMAN
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GWORD
TREASURY FOR NANCY LEE, IA
ENERGY FOR WARD, LOCKWOOD AND DAVIS

E.O. 12958: N/A
TAGS: ECON EFIN ETRD ENRG ELTN EAIR PGOV PINR SENV
MX
SUBJECT: 2010 GOM BUDGET: OPPOSITION REJECTS AND BUSINESS
SUPPORTS TAX HIKES

REF: MEXICO 2832

1. (SBU) Summary. Facing an October 20 deadline to approve
the GOM's 2010 proposed revenue bill, PRI leaders, governors,
and lawmakers met on October 12 to coordinate a consensus on
the budget. According to local press reports, PRI lawmakers
revealed that they will reject the GOM's 2% anti-poverty tax
proposal and propose to lower the telecommunications tax,
increase the deficit to 0.75% (in lieu of the 0.5% proposed
by the GOM), and raise the Mexican oil mix benchmark price to
US$61 per barrel (instead of US$53.9 set by the GOM). They
will formally announce their proposal on October 19. The
left-wing PRD is also rejecting the anti-poverty tax and has
presented an alternative plan that also proposes a higher oil
price, an increase in the deficit, as well as spending cuts.
Mexico's leading business consortium, the Consejo Coordinador
Empresarial (CCE), supports increases in income and
consumption taxes, but demands a lower rate for new
investments. End Summary.

PRI
---

2. (U) On October 12, the PRI held a 4-hour meeting to
coordinate a formal position on the GOM's economic plan.
According to local press reports, PRI lawmakers revealed that
they will take the following position, which they will
formally announce on October 19.

-- Reject the GOM's 2% anti-poverty tax proposal.
-- Agreed to increase the special tax (IEPS) on beer,
tobacco, gambling, the lottery, etc.
-- In lieu of the 4% tax on telecommunications, they will
propose an increase of 1.5 and 2%.
-- Agree to increase the income tax (ISR), although they did
not specify if it was from 28 to 30% as proposed by the GOM.
-- Agree to raise the tax on cash deposits (IDE) to 3% and
lower the floor on taxable deposits to MX$15,000 (from
MX$25,000), as proposed by the GOM.
-- Propose to increase the deficit 0.75%, in lieu of the
0.50% proposed by the GOM.
-- Propose to raise the benchmark Mexican oil price to US$61
per barrel, instead of US$53.9 set by the GOM.

3.(U) According to PRI estimates, their proposal would
generate MX$375 billion enough to cover the GOM's estimated
fiscal gap of MX$374 billion for 2010. The PRI lawmakers
interviewed also said the party agreed to increase the income
tax because it would have a larger impact on the middle
class, which is mainly the PAN's constituency.


PRD
---

4. (U) The PRD presented an alternative 2010 budget proposal,
which proposes an additional MX$550 billion (US$41.77
billion) in revenue. The PRD's proposal estimates that crude
oil prices in 2010 would be US$57 per barrel, or US$3.1
higher than the GOM's estimates, which would generate an
additional MX$25 billion (MX$1.9 billion) in revenue. The
PRD's proposal also contemplates an increase in public debt
to 1.5% of GDP, generating an additional MX$180 billion
(US$13.67 billion) to be spent on &productive investment and
job creation.8 The PRD's plan also proposes MX$100 billion
(US$7.6 billion) in cuts to the GOM's running expenses,
MX$170 billion (US$12.9 billion) to be generated by
eliminating special tax regimes, and MX$75 billion (US$5.7
billion) from a tax on dividends. PRD Chairman Jesus Ortega
explained that his party opposed plans for a 2% consumer tax
which, he argued, would affect the poor and the middle
classes. Furthermore, the PRD proposed that food and
medicines remain tax free, and affirmed that the GOM,s plans
to increase taxation would extend the economic crisis
currently affecting Mexico.

5. (U) Meanwhile, the movement led by former presidential
candidate Andres Manuel Lopez Obrador is set to present two

MEXICO 00003010 002 OF 003


bills on austerity in the public sector, which aim to abolish
the fiscal privileges of large companies and thus generate an
additional 500 billion pesos ($38 billion) in public income.
Lopez Obrador explained that his austerity bill proposed a
50% salary cut for top-ranking officials, as well as the
elimination of bonuses, major medical expenses, extraordinary
payments, and special savings accounts for top-level
bureaucrats. Furthermore, the bill would eliminate pensions
for former presidents of Mexico, would cut publicity budgets
within the public administration by 80%, and would mandate
30% savings in telephone services, consultancy, computers,
photocopies, stationery, and other supplies. Lopez Obrador's
proposals will be defended by deputies and senators belonging
to the Broad Progressive Front (FAP) -- formed by the PRD,
the PT, and the Convergence Party.

Private Sector
--------------

6. (U) As budget negotiations continue, Mexico's leading
business consortium, the Consejo Coordinador Empresarial
(CCE), said that they are willing to accept the 28% to 30%
increase in the income tax (ISR), but only if it is lowered
to 25% for new investments or re-investments, which they
consider an essential stimulus for the economy. They also
want to eliminate exemptions from the VAT and implement a
generalized VAT by increasing it from 10% to 15% at the
border. The CCE also sent a letter signed by many
associations, including the Mexican Banking Association, to
lawmakers saying that they were unwilling to pay more taxes
if the GOM did not reduce its current expenditures. They
complained that while the GOM was increasing taxes to captive
taxpayers, it was increasing current expenditures by more
than 5% and cutting public investment by 10%. They also
called for a reduction in political parties, budgets.

7. (U) The business sector continues to be concerned about
the GOM's proposed reform to the tax consolidation regime
(see reftel). They complain that the changes do not give
legal certainty to investors and are an excessive fiscal
burden particularly for exporters. According to Hacienda,
large companies only paid 1.7% of income tax (rather than the
28%) due to fiscal consolidation and the existing income tax
exemptions. Deputy Secretary of Hacienda Alejandro Werner
told lawmakers that the changes proposed in the income tax
would generate MX$70 billion, 38% of which is from the
proposed changes in fiscal consolidation. Note: All parties
have agreed on approving this reform. End Note.

PAN
---

8. (U) Responding to the CCE's complaint on political party
transfers, PAN leader and lawmaker Cesar Nava proposed
cutting these transfers in half so that political parties
could raise a larger share of their resources from private
organizations. PAN senators also submitted an initiative to
modify the Fiscal Coordination Law, so that states could
collect more taxes on their own. The initiative was
accompanied by measures to make spending of public resources
by the states more transparent.

Recent GOM Actions
------------------

9. (U) Meanwhile, the GOM has taken other actions outside of
the budget/fiscal reform negotiations to accelerate public
works projects and improve its fiscal position. On October
1, Calderon announced he would propose legislation that would
accelerate plans to build highways and ports and encourage
new investment to bolster the economy. The proposal would
allow Mexico's pension funds (Afores), to buy stocks outside
of indexes and take part in initial public offerings to
channel resources to infrastructure projects. Pension funds
could also participate in the offering of
infrastructure-project trusts on the Mexican stock exchange.

MEXICO 00003010 003 OF 003


The proposal would cut bureaucratic hurdles to reduce the
time it takes to carry out public works projects by 30
percent, Calderon said. He added that it may allow the GOM
to announce 61 billion pesos in new projects by the end of
2010, and to increase financing for projects by 125 billion
pesos by 2012.

6. (U) Also, on October 10, Calderon issued a decree ordering
the liquidation of Luz y Fuerza (SEPTEL). Federal
Electricity Commission (CFE), Mexico's other state power
company, will take over Luz y Fuerza del Centro, the smaller
money-losing state power company. According to SEGOB, the
financial situation of Luz y Fuerza is unsustainable. If Luz
y Fuerza were left to continue, the GOM would have to
transfer an estimated 300 billion pesos to the company by
2012.


Comment
-------

10. Most governors do not want a confrontation with
President Calderon, as it could be costly for all parties in
the run-up to the 2012 elections. According to the PRI
lawmakers interviewed, State of Mexico PRI governor and
current presidential front-runner Enrique Pena Nieto was
among those who supported the GOM,s 2% anti-poverty tax.
He was also against raising the benchmark oil price, because
if oil prices declined it would gravely affect states'
finances (as it did this year). (Note: States receive over
90% of their resources from the federal government which is
determined through a special formula. Oil hedge funds are
not shared with the states. End Note.) It would also mean
bad news for governors and their candidates who face local
elections next year, many of which are PRI-governed states.
As the presidential front-runner, it is also in Pena Nieto's
interest to take on the more difficult fiscal/tax reforms
now, rather than have to deal with a fiscal quandary in 2012.
The PRI's counter-proposal achieves fiscal stability mainly
by playing with the oil price assumptions and incurring more
debt, but so far there is nothing in their proposal that
would generate alternative revenue sources to replace their
dependence on oil.
Visit Mexico City's Classified Web Site at
http://www.state.sgov.gov/p/wha/mexicocity and the North American
Partnership Blog at http://www.intelink.gov/communities/state/nap /
PASCUAL

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