President Vicente Fox's proposed budget hit a wall Wednesday when the opposition Institutional Revolutionary Party unveiled an alternative fiscal plan that would eliminate his 10% tax on all food and medicine.
With the economy foundering and oil revenue headed down, Fox's budget for next year called for Mexicans to tighten their belts. Government spending would shrink by almost 1% and many government operations would be decreased or eliminated so that money could be diverted to social programs.
Unlike the days when the Institutional Revolutionary Party, or PRI, ruled by itself and could rubber stamp presidential proposals, the budget process has been highly contentious since Fox took office in 2000. His National Action Party is a minority in the Chamber of Deputies and has to negotiate with the PRI and the Democratic Revolution Party, or PAN.
A budget won't be voted on until late December but the Fox proposal has provoked intense debate and public demonstrations since it was introduced two weeks ago. Mexicans are likely to suffer, regardless of the shape the final budget takes, said Horacio Sobarzo, an economics professor at Colegio de Mexico here.
"This isn't going to satisfy anyone," Sobarzo said.
Fox's proposed budget cuts reflect Mexico's grim fiscal reality, economists say. Three years of stagnant economic growth means the tax base, thin as it is, has not grown along with population. Mexico's tax collection, calculated as a percentage of its total economic output, is an abysmal 12%, lagging most of the countries in the hemisphere.
"The reason tax collection is so poor is because the underground economy is so large in Mexico, maybe one-third of total output, and because the wealthiest people don't pay any income tax," said Leon Bendesky, an economist at the Regional Information System of Mexico here. The value added tax is also a highly unreliable method of tax collection because it is easily evaded, Bendesky said, and because the list of exemptions, especially in services, grows every year.
Mexicans pay a 15% value added tax on about half of all consumer goods, with medicines, food and books among the exemptions. Fox would lower the rate to 10% but make it applicable to all goods.
The PRI's proposal would involve taxing more products at the manufacturing rather than the consumer level. The PRI also would transfer responsibility for collecting much of the new tax to states and cities and thereby raise collection rates, said Eduardo Bailey, a PRI deputy from Nuevo Leon state.
The PRI argues that dropping the food and drug exemption would hit the poor hardest because the large portion of their incomes dedicated to buying food would then be taxed. Fox's reasoning is that a flat 10% rate is the fairest approach.
"The PRI's is an ingenuous proposal. We don't say we reject it, but it's an attempt to generate more funds without any political cost," said Federico Doring, a PAN deputy on the Congress' budget commission.
In addition, Fox proposes to cut hundreds of government jobs by ending state support of the Notimex news agency, the national lottery, the government's film production agency and handicrafts stores. He is also proposing to close or merge several scientific research institutes and use the savings to invest in education and other social services.
Large numbers of film stars, directors and technicians descended on Congress last week to lobby legislators against the proposal to close the IMCINE government film production and promotion agency. Fox subsequently backpedaled, saying support of the film industry would continue.
Employees of the threatened agencies have held a succession of marches through Mexico City this month. A massive turnout is scheduled for a Nov. 27 demonstration in the capital to include peasant groups, unions and government employees.
Fox is also being squeezed by the rising cost of Mexico's so-called hidden debts related to the bank bailout of the 1990s and private financing of public works. Oil revenue, which supplies nearly a third of the government revenue, is expected to decline by 10% next year.
Fox has less room to maneuver because the Congress in recent years has passed laws soaking up much of the discretionary funds he controls, said Jonathan Heath, chief economist of LatinSource Mexico, an economics consulting firm here.