UPDATE 2-Mexico minister seeks tax reform to fund social spending

Mon Dec 10, 2012 7:45pm EST

* 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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