Mexico Drafts an Austere Budget to Avert More Crises

The government proposed Friday what it called Mexico’s tightest budget in modern history, including tax hikes and fresh spending cuts for 1999 in the face of sliding oil revenues and a decelerating world economy.

The draft 1999 budget submitted to Congress calls for a 15% surcharge on all phone bills, tax hikes for the most wealthy Mexicans and fewer tax breaks for Mexico’s largest corporations.

Those measures would raise enough extra taxes to offset lost revenues from the unexpectedly severe plunge in world petroleum prices. Oil fell from an expected $15.50 per barrel to an actual $10.50 average this year.

Deputy Finance Secretary Martin Werner said the government is determined to maintain tough fiscal discipline through the 2000 presidential election. That austerity, he said, will ensure that Mexico breaks the cycle of financial crises that have accompanied the end of each six-year term since 1982.

Based on recent experience, the opposition majority in Congress could give the ruling Institutional Revolutionary Party executive a grueling fight over the $102-billion budget plan, which requires approval by Dec. 15.

A separate government package of financial reforms, including a program to pay for the $55-billion banking-system rescue that followed the 1994-95 financial crisis, is still stuck in Congress after months of wrangling.

Leftist opposition parties have said they will oppose any cuts in programs for the poor, while the right-wing National Action Party wants further spending cuts rather than tax hikes. The government contends that its budget does not cut support for the poorest Mexicans.

The budget plan projects inflation to remain stubbornly high at 13% in 1999 compared with 17.8% this year, a figure partly attributable to the 20% slide in the peso’s value against the dollar. The peso, now at 10.05, is expected to average 11.08 to the dollar next year.

Meanwhile, the slowing U.S. economy is expected to reduce the appetite for products from Mexico next year. The U.S. buys 80% of Mexico’s exports. Mexico’s internal demand, however, has remained buoyant, helping maintain a reasonable growth level this year.

Spending on government programs would be reduced by 0.5% of the gross domestic product to 15% of the GDP--the lowest rate of government expenditure in two decades. The 1999 reduction would follow a series of unpopular budget cuts imposed in 1998 that totaled 1% of GDP, in response to the steadily falling oil price.

The additional cuts would keep the 1999 budget deficit at an austere 1.25% of GDP, down from this year’s deficit of 1.42% of GDP.

“Since 1994 [when the current government took office], we have cut spending by 2.6% of GDP,” Werner said. “We feel this restraint will allow us to start recovering in the second half of 1999.”

He said he expects the economy to grow a respectable 3% next year and climb back to 5% during 2000, with inflation declining steadily to 10% during the election year--when the PRI hopes to fend off the most serious challenge in decades by opposition presidential hopefuls.

Werner said the government still needs to overhaul and improve its tax system. He noted that Mexico collects about 11% of GDP in taxes while Chile, regarded as one of the most efficient Latin American countries, collects taxes worth 18% of GDP.