SENIOR CONGRESSIONAL STAFFER DISCUSSES MEXICAN

UNCLAS SECTION 01 OF 02 MEXICO 007015

SIPDIS

SENSITIVE
SIPDIS

STATE FOR A/S SHANNON
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA
STATE FOR EB/ESC MCMANUS AND IZZO
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/ARUDMAN
USDOC FOR ITS/TD/ENERGY DIVISION
TREASURY FOR IA (ALICE FAIBISHENKO)
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND SLADISLAW
STATE PASS TO USTR (EISSENSTAT/MELLE)
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA)
NSC FOR DAN FISK, CYNTHIA PENDLETON

E.O. 12958: N/A
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: SENIOR CONGRESSIONAL STAFFER DISCUSSES MEXICAN
BUDGET, FISCAL REFORM

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Summary and Introduction
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1. (SBU) Finance Secretary Agustin Carstens for weeks has
highlighted publicly the need for fiscal reform in Mexico.
At a recent conference in Mexico City, he said that Mexico
needs to implement a broad fiscal reform to confront growing
pension liabilities, rising payments on financed investment
projects, over-reliance on income from the state-run oil
company, and growing social spending needs. He added that
only Guatemala has a lower tax collection rate than Mexico in
Latin America, and that without reforms, Mexico's fiscal
deficit could reach 3 percent of GDP by 2012. A top staffer
of the Chamber of Deputies Finance Committee told econoffs
that the legislature should start discussing the general
outline of a fiscal reform package in January 2007. He said
that the words "fiscal reform" have been used for so long
that people do not know exactly what they mean. He stressed
that fiscal reform will be a gradual and continuous process
in Mexico. He believed the most important goal of any fiscal
reform should be increasing the number of taxpayers.
Regarding the 2007 federal budget, he assured econoffs that
the discriminatory 20-percent tax on beverages sweetened with
anything other than cane sugar would be eliminated. He said
that Carstens is a "natural negotiator" who "sits down with
everyone at the table as equals." A short biographic note on
the contact is included. End Summary.

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Senior Staffer Calls for a "Realistic" Fiscal Reform
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2. (SBU) Econoffs on December 19 met with Jose Gildardo Lopez
Tijerina (strictly protect),a top staffer (Secretario
Tecnico) of the Chamber of Deputies Finance Committee, to
discuss fiscal reform and the 2007 federal budget. Lopez
Tijerina began the discussion about fiscal reform by saying
that he expects the legislature to start considering a
general outline of a fiscal reform package in January 2007.
That said, he noted how he and other Mexicans have heard the
words "fiscal reform" for so long that no one knows exactly
what they mean. He opined that fiscal reform in Mexico will
be a gradual, continuous process, not something that is done
at all at once. While stressing the need for fiscal reform,
he said that any such reform has to be "realistic."


3. (SBU) In his opinion, the most important goal of any
fiscal reform should be increasing the number of taxpayers.
He said that Mexico has 43 million economically active
people, but that only 12 million pay taxes. Lopez Tijerina
said that one way to increase tax collection is to tax
consumption -- as Calderon's 2007 budget proposal attempts to
do with the new 5-percent tax on soft drinks. Lopez Tijerina
assured econoffs that, regardless of the final level of the
soft drink tax, the discriminatory 20-percent tax on
beverages sweetened with anything other than cane sugar would
be repealed, in keeping with Mexico's WTO obligations. He
added that Mexico has to learn to compete in the global
economy without trade barriers. (Note: the lower house on
December 18 approved the elimination of the discriminatory
20-percent beverage tax when it ratified the income side of
the federal budget package. The Senate approved this bill on
December 20, but reserved the right to make changes to
certain parts of it. End Note.)


4. (SBU) Lopez Tijerina outlined other key aspects of a
fiscal reform, such as the need to reduce corruption,
particularly in customs, and to improve enforcement in order
to reduce tax evasion -- something he said many Mexicans see
as a game with no serious consequences. He said Mexico also
should review its special tax regimes and exemptions, noting

MEXICO 00007015 002 OF 002


that some industries no longer require tax exemptions to be
profitable. He stressed how Mexico needs to reduce its
dependence on oil revenues, adding that oil-related products
account for 37-38% of government revenues. He believes that
Mexico should review its "nationalistic approach" to the oil
industry, implying that he favors at least a partial opening
this sector to private investment. Lopez Tijerina noted that
current tax laws favor taxpayers over tax collection, and he
emphasized how adjusting taxes is difficult because every
time you touch a particular tax, "someone screams."

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Comment
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5. (SBU) Fiscal reform is indeed key to Mexico's ability to
keep its fiscal house in order, as the government cannot
continue relying on volatile oil revenues to make up for its
poor performance collecting taxes. Fiscal reform also will
allow the government to dedicate more resources to such key
issues as public security, poverty reduction, and education.


6. (SBU) The smooth passage of the bill in the Chamber of
Deputies is a positive, early signal that Calderon may have
an easier time negotiating a broad fiscal reform with
Congress than his predecessor. Indeed, legislators from all
political parties agreed to start examining a fiscal reform
in January.

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Bio Note on Agustin Carstens
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7. (SBU) While discussing the quick approval of the income
side of the federal budget in the Chamber of Deputies, Lopez
Tijerina told econoffs that Finance Secretary Agustin
Carstens is a "natural negotiator." He appeared to respect
how Carstens "sits down with everyone at the table as
equals." He also noted how the Finance Secretariat under
Carstens' leadership was good at "coming to them" to explain
its proposals.

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Bio Note on Jose Lopez Tijerina
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8. (U) Lopez Tijerina (PRI) is an academic, economist, and a
specialist on fiscal issues from the National Autonomous
University of Mexico. He has written several books on fiscal
issues, and previously was an advisor on the Finance
Committee under Jorge Chavez Presa.


9. (SBU) Lopez Tijerina told econoffs that he spent part of
his childhood in San Antonio, Texas, and that the immigration
issue was not nearly so controversial at that time. He said
that during a past visit to Chicago, he was struck by how the
city's large Mexican population made it "feel like Mexico
City." He told econoffs that Mexico needs to create jobs to
keep its citizens from moving to the U.S. He added that, as
someone working in the legislative branch, he fully agrees
that Washington has every right to regulate immigration.


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