Identifier
Created
Classification
Origin
07MEXICO2518
2007-05-17 21:35:00
UNCLASSIFIED
Embassy Mexico
Cable title:  

MEXICO'S GOVERNMENT BUILDING SUPPORT FOR FISCAL

Tags:  ECON ELAB EFIN PINR PGOV MX 
pdf how-to read a cable
VZCZCXRO8853
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DE RUEHME #2518/01 1372135
ZNR UUUUU ZZH
P 172135Z MAY 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 7015
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEHNSC/NSC WASHDC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUEHC/DEPT OF LABOR WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 04 MEXICO 002518 

SIPDIS

SIPDIS
SIPRNET

STATE FOR A/S SHANNON
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, AND DRL/AWH
STATE FOR EB/ESC MCMANUS AND IZZO
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD
USDOC FOR ITS/TD/ENERGY DIVISION
TREASURY FOR IA (ALICE FAIBISHENKO)
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND ALOCKWOOD
NSC FOR DAN TOMLINSON, RICHARD MILES
STATE PASS TO USTR (EISSENSTAT/MELLE)
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA)

E.O. 12958: N/A
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: MEXICO'S GOVERNMENT BUILDING SUPPORT FOR FISCAL

REFORM

-------
Summary
-------

UNCLAS SECTION 01 OF 04 MEXICO 002518

SIPDIS

SIPDIS
SIPRNET

STATE FOR A/S SHANNON
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, AND DRL/AWH
STATE FOR EB/ESC MCMANUS AND IZZO
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD
USDOC FOR ITS/TD/ENERGY DIVISION
TREASURY FOR IA (ALICE FAIBISHENKO)
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND ALOCKWOOD
NSC FOR DAN TOMLINSON, RICHARD MILES
STATE PASS TO USTR (EISSENSTAT/MELLE)
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA)

E.O. 12958: N/A
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: MEXICO'S GOVERNMENT BUILDING SUPPORT FOR FISCAL

REFORM

--------------
Summary
--------------


1. (SBU) President Calderon and members of his administration
have been working with Congress to build support for fiscal
reform. The government would like for the reform to be
approved during a special session of Congress this summer so
the new measures can be incorporated into the President's
2008 federal budget proposal, which is due to the Chamber of
Deputies on September 8. To secure the initiative's passage
in Congress, the government will need support from the
Institutional Revolutionary Party (PRI) -- which, among other
things, is pushing for more resources for the states and
refusing to levy the value-added tax food and medicine. The
debate over fiscal reform is currently in a holding pattern
because of the close PAN-PRI election in Yucatan on May 20.
Several contacts have told econoff that the PAN should be
able to count on PRI support for fiscal reform if the PRI
candidate wins the race, but not necessarily if she loses.
The government has not disclosed the specifics of its reform
proposal but says it wants to simplify the tax system, reduce
administrative costs, make the tax system more transparent
and equitable, and increase tax collection by 2-3% of GDP in
the coming years. Some observers have said that fiscal
reform will be more difficult to pass than pension or energy
reform, and have opined that the final reform may not be as
comprehensive as it should be. End Summary.

--------------
The Importance of Fiscal Reform
--------------


2. (SBU) For many, Mexico's most pressing public policy
problem is that the government relies on oil-related revenues

to finance 38% of its spending, and that states and
municipalities depend on transfers from the federal
government for more than 90% of their revenues. In Latin
America, only Guatemala has a lower tax collection rate than
Mexico. Reasons for such poor collection include a large
underground economy, complex tax laws, numerous preferential
regimes and exemptions that allow companies and individuals
to significantly reduce effective tax rates, and a
generalized "why should I pay?" sentiment that stems from a
lack of confidence in how tax dollars will be used and from a
feeling that everybody wants someone else to pay.


3. (U) Regarding the value-added tax (VAT),numerous
exemptions (e.g. books and public transportation) and a large
proportion of goods and services with a zero tax rate (e.g.
food) mean that only a small part of the potential base is
actually being taxed. Although the zero-rating and
exemptions are often perceived as helping poorer families, an
OECD study shows that more affluent households gain the most
since they buy more goods in general, including those with a
zero tax rate.

--------------
Government Lobbying for Support
--------------


4. (SBU) President Calderon and members of his administration
in recent weeks have been meeting with Congress to build
support for fiscal reform. A contact from the Chamber of
Deputies told econoff that the government would like to call
a special session of Congress to debate the proposal in the
June-July timeframe. Marco Oviedo Cruz, the Director of
Financial Planning in the Finance Secretariat (strictly
protect),told econoff on May 14 that the government would
like to have the reform signed into law before the
President's federal budget proposal is due to the Chamber of
Deputies on September 8 so the new measures can be included

MEXICO 00002518 002 OF 004


in the 2008 budget. He added that, ideally, the proposal
would be approved before the ordinary session of Congress
opens on September 1 because discussions at that time will be
dominated by the 2008 budget. Gustavo Madero, the President
of the Senate Finance Committee, (strictly protect) echoed
this timeline, and added that Plan B was to approve fiscal
reform between September and December 2007 and Plan C was to
approve it between February and April 2008. Madero said that
the window of opportunity could be lost after April 2008
because the lower house of Congress would be gearing up for
the 2009 elections.


5. (SBU) As Calderon's National Action Party (PAN) lacks a
majority in Congress, it will need support from the
Institutional Revolutionary Party (PRI) to pass the
initiative. Several contacts have told econoff that the
debate over fiscal reform is currently in a holding pattern
because of the May 20 election in Yucatan -- the first local
race held during the Calderon administration. The PAN
candidate hopes to retain the state's governorship, while the
PRI is betting on taking back a state it governed for more
than 60 years. Some members of the PRI are already crying
foul and alleging that Calderon is interfering in the
election. Both HSBC economist Alejandro Martinez (strictly
protect) and Oviedo Cruz said that the PAN should be able to
count on PRI support for fiscal reform if the PRI candidate
wins the race, but not necessarily if she loses. Madero
implied the same when he told econoffs that the PRI was using
this election as a "threat." He added, however, that his
counterparts in the Chamber of Deputies have been willing to
work closely with the Senate and the PAN to pass the reform.


6. (SBU) The PRI is not lending its support as readily as it
did earlier this year for pension reform. The PRI, which
controls 17 state governments, has said it wants states to
have more control over the funds they receive from the
federal government. Oviedo Cruz acknowledged that the
government agrees that the states need more resources, but
added that it wants states to show more transparency in how
they spend public funds. Finance Secretary Carstens has said
publicly that he does not want to give the states more money
from the federal budget or increase their ability to raise
funds on their own without guarantees that the money will be
spent responsibly.


7. (SBU) Moreover, senior PRI members have said publicly that
their party is willing to support fiscal reform as long as it
does not include taxing food and medicine -- long a
controversial issue here -- and as long as the Secretariats
of the Environment, Social Development, and Agriculture are
decentralized. The PRI claims that these secretariats at the
state level are used to curry favor with the public and build
political support.


8. (SBU) Echoing comments from a contact at the stock
exchange, Madero said he expects a "light" fiscal reform
because the government wants the initiative passed before
September 8. In his opinion, the final reform "will not be
in proportion to the size of the problem." Madero told
econoffs that fiscal reform is significantly more difficult
to pass than pension or energy reform because everyone is
affected by fiscal reform, not just a particular union or
segment of society. Moreover, while everyone agrees what the
problem is, ideas about how this problem should be solved
vary widely. On a positive note, Madero praised Calderon's
and Finance Secretary Carstens' negotiating skills, noting
the improvement from the previous administration.

--------------
Details of Proposal Scare
--------------


MEXICO 00002518 003 OF 004



9. (SBU) The government has not disclosed the specifics of
its plans to overhaul the tax system, but Under Secretary of
Revenue Fernando Sanchez Ugarte has said publicly that the
Finance Secretariat's tax reform proposal aims to simplify
the tax system, reduce administrative costs, and make the tax
system more flexible, transparent, equitable, and better able
to promote competitiveness. Oviedo Cruz told econoff that
their goal is to boost revenues by 2-3% of GDP in the coming
years.


10. (SBU) Oviedo Cruz told econoff that the government would
not impose the value-added tax (VAT) on food and medicine in
its proposal because it knows that this would never be
approved in Congress. He said that fiscal reform "is already
becoming controversial," noting a leaked recording in which
press reports say Carstens asked deputies to reconsider the
subsidies the government gives people whose salary is less
than the equivalent of four minimum wages. This subsidy
completely covers these workers' tax bill, and even leaves
them with a little extra. Oviedo Cruz told econoff that the
government does not plan to go after people in the lower
income brackets to increase tax collection.


11. (SBU) Gustavo Madero shed more light on the proposals
currently being discussed. He acknowledged that the idea of
charging the VAT on food and medicine has been discarded, but
noted that they may try to find another way to do essentially
the same thing for food items, which have the potential to
notably increase revenues (Comment: he did not specify how
they would accomplish this, but press reports have noted a
few alternatives, including having the government eliminate
tax refunds for food producers. End Comment). He added that
the idea of charging the VAT on food has become so
politicized that alternative proposals could not even
resemble a VAT. Madero said that another proposal being
discussed is a flat tax. The problem the PAN, and the PRI in
particular, face is eliminating the unions' privileges and
deductions. He opined that a way around this problem is to
eliminate deductions in general and to simplify the tax
system.


12. (SBU) In Madero's opinion, the government should strive
to increase the small base of contributors. He said that
about 80% of total tax collection comes from the rich, and
that the poorest 40% of the population do not pay taxes. He
wants to capture more tax revenue from the people in the
middle of this spectrum. Madero also would like to see the
states and municipalities increase their tax collection. He
said that the federal government currently collected 92% of
taxes, and the states only 8%. However, the government
spends 48% of federal funds, and the states 52%. There are
very few local taxes, and states and municipalities are poor
at enforcing tax collection. As an example, he cited the
property tax, a municipal resource, which only represents
0.3% of GDP.


13. (SBU) Comment: The importance of implementing a reform
that increases tax collection, reduces tax evasion, makes
government spending more efficient, and lowers the country's
dependence on oil revenues cannot be understated. Such a
plan is needed to create a broader and more stable base to
finance government spending and to meet growing social
spending needs. While it is disappointing to hear some
already saying that the reform may be "light," it is not
completely surprising given the fact the government is asking
people to pony up more money. It is better to have a "light"
reform that gets passed than no reform at all. End Comment.


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 /

MEXICO 00002518 004 OF 004


GARZA