Mexico considers tax increases
By Adam Thomson in Mexico City
Published: May 8 2009 00:01 | Last updated: May 8 2009 00:15
Mexico is studying plans to introduce a wide-ranging tax reform, possibly as early as next year, that would increase taxes and allow the government to abandon its strict spending limitations during difficult times.
In a press conference on Thursday, Agustín Carstens, the finance minister, told a small group of foreign media that the country had to continue gradually increasing income from non-oil sources. “We have to start that process next year,” he said.
At the same time, the government was considering abandoning its current “zero-deficit” law in favour of one linked to the country’s economic cycle. While stressing the need for accumulating surpluses during the good times, Mr Carstens said that such a change would allow for greater spending flexibility in periods of low or negative growth.
“The idea is to maintain a clear target in the medium term and to make use of some degrees of freedom in the short term,” he said.
Mr Carstens said that the government would decide whether to adopt the plans in the coming months. He confirmed that they would need congressional approval in the event of deciding to forge ahead with them.
His comments come as Mexico’s public finances face an increasingly complex scenario. The IGAE, a leading indicator of economic growth, fell 10.8 per cent in February compared with the same month last year – the biggest fall since records began in 1993.
The rapid economic contraction – Mr Carstens confirmed on Thursday that Mexico had entered recession – has led to a precipitous fall in government revenue at a time when oil prices continue to be well below the price that was estimated in this year’s budget.
The government has not felt the effects the impact of lower oil prices this year too much – it relies on oil to provide almost 40 per cent of total government income – because it cleverly bought options contracts last year to ensure a minimum income of $70 a barrel on all its exports.
But Mr Carstens on Thursday admitted that purchasing similar contracts next year was not an option. As a result, he said, the government would have to increase borrowing, cut spending, raise taxes, or a mixture of all three.
“The reality is that we are going to face a much tighter environment next year, and those are the options we have,” he said. “We will have to make use of these three components.”
When pressed on what form the proposed tax increase might take, Mr Carstens said: “I don’t want to jump the gun, it is the most sensitive part [of the plans] and we are still at the drawing-board stage.”
He stressed that the government would be sensitive to the dangers of stifling economic recovery, and said that the extent of the proposed tax increases would depend on the strength of the rebound.