AMLO ANNOUNCES A SUBSIDIES PROGRAM

UNCLAS SECTION 01 OF 02 MEXICO 003302

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/MEX, WHA/EPSC
STATE PASS USAID FOR LAC:MARK CARRATO
TREASURY FOR IA MEXICO DESK: JASPER HOEK
COMMERCE FOR ITA/MAC/NAFTA: ANDREW RUDMAN
ENERGY FOR INTERNATIONAL AFFAIRS KHARBERT AND KDEUTSCH

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV PINR MX
SUBJECT: AMLO ANNOUNCES A SUBSIDIES PROGRAM


Sensitive but unclassified, entire text

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SUMMARY
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1. (SBU) On May 30, Democratic Revolutionary Party (PRD)
candidate Andres Manuel Lopez Obrador (AMLO) announced on
national TV some details of a comprehensive subsidies
program aimed at increasing Mexican families' income and
their purchasing power by up to 20%. AMLO expects the plan
would spur economic growth, employment and productivity by
increasing income and consumption through a set of economic
supports for the elderly and a reduction of energy rates.
Many local analysts note that without fiscal reform, AMLO's
proposal is not feasible. End summary.

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AMLO ANNOUNCES A "NEW" ECONOMIC/SOCIAL PROGRAM
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2. (SBU) On May 30, six days before the last debate, AMLO
announced an economic-social program aimed at increasing
Mexican families' income and their purchasing power. In a
two-minute message on national television networks, the PRD
candidate promised to increase income and purchasing power by
an average of 20% for all Mexicans earning less than MP 9,000
(USD 790) per month. AMLO's plan, which he proposes
implementing immediately upon taking office, includes lower
energy rates and other economic supports. A day after its
announcement, AMLO's economic advisor Rogelio Ramirez de la O
held a press conference to explain the proposal in more
detail. The announcement also provided some new, albeit
limited, specificity to a proposal that has been a
fundamental piece of his campaign - a promise to cut
government expenditures by 1% of GDP in order to increase
social spending.

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ECONOMIC IMPACT ON FAMILY INCOME
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3. (SBU) Ramirez de la O explained that AMLO's plan to reduce
energy fees and expand the economic support system for the
elderly would have a positive impact on the income of 18
million families. AMLO's economic team calculated the impact
this comprehensive subsidy program would have on families'
income as a function of their monthly earning:
- For families with a MP 2,500 (USD 219) monthly income, the
impact would be up to 23%
- For families with a MP 5,000 (USD 438) monthly income, the
impact would be up to 17%
- For families with a MP 9,000 (USD 790) monthly income, the
impact would be up to 14%
Ramirez de la O calculates that the average impact of AMLO's
social programs would be a 20% increase in income. He added
that the promised reduction in electricity fees would have a
cascading effect on other prices, which would benefit all
consumers.

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PROJECTED COST OF THE SOCIAL PROGRAM
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4. (SBU) This comprehensive subsidy program would represent
MP 100 billion (USD 8.7 billion) more in higher income for
families. The total fiscal cost would be MP 80 billion (USD
7 billion) distributed as follows: MP 10 billion for the
reduction of electricity fees, both for individuals and
businesses; MP 15 billion for the reduction of gasoline
prices; MP 35 billion for the economic support program for
elderly; and MP 20 billion for free school materials. The
other MP 20 billion (USD 1.7 billion) would be obtained
through the reduction of other prices as a result of the
lower energy rates. According to Ramirez's projections, the
AMLO administration would obtain the needed resources through
rigorous budget management and a change in the government's
spending culture.

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INFEASIBLE PROPOSAL WITHOUT FISCAL REFORM
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5. (SBU) Many local analysts agree that AMLO's proposal to
increase spending on subsidies is not feasible without
improving tax collection. The social program proposed by the
PRD candidate represents 1% of GDP, which in addition to the
current tax evasion rate of 1.3% of GDP, would increase the
fiscal deficit and public debt. Ramirez de la O explained
that this would not be the case because the AMLO
administration would cut some budget items. However, AMLO's
proposed reduction in government officials' salaries and
other administrative costs to offset the cost of the
subsidies could prove difficult in practice. Moreover, a
reduction of prices in basic services would create
distortions to real costs. According to Ramirez de la O, the
PRD's subsidies program would translate into higher income,
triggering more consumption. But, some analysts worry that
higher consumption would create inflationary pressures. The
inflationary problem could be mitigated if the central bank's
autonomy to manage inflation by manipulating the corto is
respected. However, on several occasions AMLO has said that
the Bank of Mexico's main objective should not only be
controlling inflation, but promoting economic growth and
employment.


6. (SBU) Throughout the campaign, critics have charged that
AMLO disregards economic fundamentals. Ramirez de la O
explains that AMLO's government would spend MP 35 billion in
the economic support program for the elderly. Currently,
there are approximately 5.15 million citizens over 65
years-old. In order to give the elderly a monthly allowance
of MP 650, AMLO would have to budget MP 40 billion in
addition to the costs for administering the program; bringing
the total estimate for the first year to MP 60 billion.
Given that Mexico's population over 65 years is growing at an
annual rate of 4%, revenues would have to grow very quickly
to sustain the program.

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COMMENT
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7. (SBU) AMLO's announcement of his subsidies program at the
end of May could be his last official economic proposal
before the elections. In advance of the June 6 debate, it
was an effective publicity strategy and may have regained
support he lost after publicly calling President Fox a
"pelele," or weakling . Most polls place AMLO at least 2
points ahead of Felipe Calderon from the National Action
Party (PAN). Only two weeks before July 2, both front-runner
candidates are more likely to focus more on accusations and
attempts to discredit their opponent, than proposing any more
new proposals.


8. (SBU) Ramirez de la O acknowledged that similar social
programs have existed for years. Former PRI president Carlos
Salinas de Gortari called his program "Solidaridad", the
ruling party PAN re-named it "Oportunidades", and all have
made good use of the programs during the campaign.
Nonetheless, AMLO's failure to provide more details on how
the cost of this program would be offset, and his inflated
expectations of a MP 100 billion budget savings have raised
concerns among some analysts. End comment.


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