UPDATE 5-Mexico lawmakers revise tax plan, oil price to plug shortfall

Fri Oct 18, 2013 9:21pm EDT

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By Miguel Gutierrez and Dave Graham
    MEXICO CITY, Oct 18 (Reuters) - Mexico's lower house of
Congress on Friday voted to raise the oil revenue estimate in
next year's budget to help close a funding gap created by
cutbacks to President Enrique Pena Nieto's planned tax reform.
    Giving final approval to the revenue section of the 2014
budget, the lower house of Congress proposed raising the oil
price forecast in the plan to $85 per barrel from $81.
    Mexico's crude mix has averaged around $96 a barrel this
year, according to Thomson Reuters data, and the Finance
Ministry has often opted for conservative price estimates.
    Before lawmakers made the oil price change, Finance Minister
Luis Videgaray had said various cuts to the president's proposed
tax overhaul would leave a $4.4 billion shortfall.
    The lower house earlier backed the revised fiscal bill,
rolling back plans to apply sales tax to rents, mortgages,
property sales and school fees, while raising the top income tax
rate on a sliding scale to 35 percent from 30 percent.
    The broad sweep of the bill that includes measures to tax
capital gains on the stock market, close loopholes exploited by
companies and levy a charge on soft drinks, met with stiff
resistance among conservatives and intense corporate lobbying.
   
    But Videgaray noted Mexico had one of the weakest tax takes
in the industrialized world, and needed stronger revenues.
    "It's always controversial to propose taxes, but it's
something that falls to the government. Nobody likes it," the
finance minister told Mexican radio on Friday.
    Among the measures added this week to the president's fiscal
plan was a 5 percent tax on junk food in Mexico, which has one
of the highest rates of obesity on the planet.
    
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    The lower house revisions proposed a weaker exchange rate of
12.90 pesos per dollar in next year's budget, compared with the
prior estimate of 12.60 per dollar.
    Jose Trejo, a member of the opposition conservatives who
heads the lower house finance committee, said the changes to the
revenue forecasts would make up for most of the tax shortfall.
    The lower house retained a proposal for a budget deficit of
1.5 percent of gross domestic product in 2014.
    Videgaray said the cuts to the tax reform meant it would
only improve Mexico's tax take by about 1 percentage point of
GDP in 2014, 0.4 of a point less than originally planned.
    He noted the revised plan would boost receipts by nearly 2.8
percent of GDP by 2018, a tenth of a point below the forecast in
Pena Nieto's original initiative. 
    The tax bill must still be passed by the Senate, which is
expected to do so by the start of November. The bill is tied to
the 2014 budget, which must be signed off on by mid-November. 
    The original budget proposal eyed economic growth of 3.9
percent for next year, a forecast lawmakers maintained. Latin
America's second-biggest economy has struggled this year and is
expected to muster growth of barely 1 percent in 2013.
    Many analysts are also skeptical the fiscal reform will lead
to a significant improvement in Mexico's tax take.
    Central bank Governor Agustin Carstens said the government
may need to put forward further fiscal reform.
    "Perhaps collecting less (tax) will eventually oblige the
Finance Ministry to come back with another proposal during this
administration," Excelsior TV cited Carstens as saying in an
interview posted on its website on Friday.
    "It is a good move in several directions. For instance, I
think generalizing sales tax on a national level is crucial,"
Carstens said. "I also think it is a good move because it will
ensure spending discipline."
    Earlier this year, Pena Nieto's Institutional Revolutionary
Party opened the door to widening the application of sales tax
to include food and medicine, a move many economists say is
crucial to strengthening Mexico's tax-raising powers.
    But the government harbored concerns that such a move could
ignite resentment among the poor, who make up nearly half the
population in Mexico. In the end, the Finance Ministry dropped
the idea when the economy suffered a contraction.
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