UPDATE 4-Mexico plans more taxes, cuts in bureaucracy

(Adds proposal submitted, Calderon quote)

By Jason Lange

MEXICO CITY, Sept 8 (Reuters) - Mexican President Felipe Calderon asked Congress to slash spending on government bureaucracy and raise taxes to prop up public finances as the country languishes in a deep recession.

The most severe downturn since 1932 and a plunge in oil production have slammed government revenues, hurting Mexico's efforts to improve its shoddy schools, roads and hospitals.

Calderon submitted proposals to lawmakers on Tuesday that include austerity measures and new tax revenues which the leader said would be worth 180 billion pesos ($13.5 billion) in funding for next year's budget.

"It's a drastic adjustment," Calderon told reporters.

Mexico's central bank has warned about raising taxes during hard economic times, but Mexico is also trying to fend off threatened downgrades by Wall Street debt rating agencies.

Rating agencies worry about Mexico's paltry tax collection and its dependency on oil, which are used to fund the budget and pay back creditors.

Calderon said the hardship that more taxes would mean for the public would be shared by the government, which would eliminate three federal ministries. He promised to direct revenues from new taxes to social spending.

"We can't eradicate extreme poverty or guarantee access for all Mexicans to health care and quality education if we do not have solid public finances," he told reporters.

Finance Minister Agustin Carstens handed the president's proposal, which came as part of the government's plan for the 2010 budget, to the lower house of Congress. More details on the plan were not immediately available.

DEEP REFORMS PLEDGED

Mexico has been under pressure to raise non-oil revenues for years. The government takes in taxes worth about 10 percent of GDP -- a level roughly on par with Haiti.

Mexico is a top supplier of oil to the United States but its crude output has slid by more than a quarter since 2004 as yields have dropped at the aging Cantarell field.

"Oil has begun to run out and the economic crisis has affected government income," Calderon said on Tuesday.

Oil revenues fund nearly 40 percent of the federal budget and bond rating agencies have warned they may downgrade Mexico's debt ratings due to the country's heavy reliance on the waning oil industry.

A downgrade in the country's debt rating would lead many investors to dump Mexican assets, pushing up interest rates in Mexico and further complicating economic recovery.

Pledging to push for deep reforms, Calderon said the economic proposals submitted today would also include proposals to overhaul stifling labor and energy laws, as well as improve financial regulation and competition in the telecommunications sector.

"It is time to change and to change deeply," he said.

Most of the 180 billion pesos in extra funding would come from new tax revenues. The plan would save 80 billion pesos in government austerity programs.

The finance ministry previously had projected a fiscal shortfall of about 300 billion pesos next year. ($1=13.3382 pesos) (Additional reporting by Miguel Angel Gutierrez; editing by Andre Grenon)