UPDATE 2-Mexico minister seeks tax reform to fund social spending
* Videgaray says all taxes will be reviewed * Tax subsidies and exemptions are hefty chunk of revenue * Government hedges 2013 exports at around $84.90 per barrel By Michael O'Boyle MEXICO CITY, Dec 10 (Reuters) - Mexico's new government vowed on Monday to review all taxes next year as part of a comprehensive fiscal reform needed to fund a series of new programs such as unemployment insurance. Finance Minister Luis Videgaray said changes to all major taxes - including controversial exemptions to value-added tax (VAT) - would be considered to boost revenue and pay for programs proposed by President Enrique Pena Nieto, who took office on Dec. 1. "All taxes need to be the object of an integral review," Videgaray told a meeting of lawmakers at Mexico's lower house of Congress. "We cannot ... have a patchwork approach." Mexico depends on income from the state oil monopoly Pemex to fund nearly one-third of the federal budget. Mexico has one of the smallest tax takes in Latin America, collecting about 11 percent of gross domestic product, excluding oil income. Videgaray's 2013 budget proposes increasing spending by less than 3 percent along with the projection that Latin America's No. 2 economy would slow from 3.9 percent growth in 2012 to 3.5 percent next year. Mexico has struggled to get major tax reforms through a divided Congress and its last significant change was in 2009 when former President Felipe Calderon raised the VAT by 1 percentage point to 16 percent. But analysts think that Pena Nieto's centrist Institutional Revolutionary Party, or PRI, may now be willing to back some of the same proposals it shot down when in opposition, such as extending the VAT to food and medicine. Upon taking office, Pena Nieto brokered a deal with major opposition parties to jointly back more infrastructure spending and an overhaul of Mexico's social security safety net, including unemployment insurance and pensions for the elderly. Economists have said Pena Nieto showed political acumen in getting major political parties to first sign the pact on specific goals before making concrete tax proposals. 2.5 PCT OF GDP Videgaray refused to detail any specific tax plans but he told lawmakers there would be no way to pay for the social security program and unemployment insurance without deep tax reforms. "For these (programs) we need tax reform, it cannot be done with the resources we have," he said. Around one-third of the nation's workers labor in the informal sector, in unregistered business such as street market stalls. Informal workers generally do not pay taxes and lack benefits from their jobs, such as health insurance. When credit rating agencies downgraded Mexico's debt in 2009, they cited the risk of counting on volatile oil prices and declining production. Mexican oil output fell by nearly a quarter between 2004 and 2009 as the country's main fields aged. Credit Suisse economist Alonso Cervera said in a note that government estimates of the amount of taxes that are lost due to lack of VAT taxes on food and medicine, along with other exemptions and subsidies, add up to 2.5 percent of GDP. "They should all be seen as potential components of an eventual fiscal reform, in our view," Cervera wrote in a note. Videgaray told lawmakers the country has hedged next year's expected crude oil exports at a price around $84.90 per barrel. Mexico hedges a large chunk of its revenue from state oil monopoly Pemex for the year ahead in one of the largest hedging programs in the oil market. In January, the Finance Ministry said it had hedged 211 million barrels of crude oil for 2012 at an average of $85 per barrel. In 2010, it hedged 222 million barrels of 2011 production at $63 per barrel. In 2009, Mexico's oil hedges proved a lifesaver for the country's finances as crude prices crashed. After locking in a minimum price for its net oil export volumes for the year, disaster was averted as Mexico staggered into its worst economic downturn since the 1990's.
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