Left's backing boosts Mexico tax plan chances, right skeptical

Reuters News
Posted: Sep 09, 2013 5:54 PM
Left's backing boosts Mexico tax plan chances, right skeptical

By Ana Isabel Martinez and Simon Gardner

MEXICO CITY (Reuters) - The Mexican government's long-awaited tax reform won support from the leftist opposition on Monday, boosting its chances of passing Congress, but the center-right was more skeptical about a plan that foresees running up a budget deficit.

Comprising a mix of higher taxes on the wealthier, a new charge on stock market gains and scrapping two-thirds of Mexico's tax breaks and exemptions, the plan was less aggressive than many had expected before its unveiling on Sunday.

Business groups and economists expressed disappointment that President Enrique Pena Nieto had not opted for a deeper reform, but the bill put forward appears designed to chart a middle course through Congress, where the government lacks a majority.

"Fundamentally, I'd say that there are sufficient grounds for us to vote in favor of this," Jesus Zambrano, leader of Mexico's main leftist political grouping, the Party of the Democratic Revolution (PRD), told Reuters.

The fiscal reform had been expected to include measures to apply sales tax to food and medicine for the first time, but Pena Nieto ultimately backed away from this following a surprise contraction in the economy and growing protests on the left.

Seeing that companies would not be hit by the sales tax, the stock market was buoyed by the plan, while the initial response from credit rating agencies was mixed to positive.

Finance Minister Luis Videgaray said on Monday the government had no plans for a sales tax on food and medicine during Pena Nieto's term.

In office since December, Pena Nieto is trying to pass a raft of reforms that will go a long way to defining his presidency and he is already seeking to defuse tensions over an education reform that has sparked disruptive protests in Mexico.

Leftists have also attacked his plan to open up the oil industry to more private investment, with presidential runner-up Andres Manuel Lopez Obrador pledging to fight the energy reform with mass marches until the government scraps it.


The fiscal plan aims to raise revenues by nearly 3 percent of gross domestic product by 2018, or almost $35 billion.

Zambrano and his fellow opposition leader, Gustavo Madero of the conservative National Action Party (PAN), signed a pact to work with Pena Nieto's Institutional Revolutionary Party (PRI)that has formed the basis for the president's reform agenda.

Striking a balance between the competing interests of the three parties has been vital to keeping the pact afloat, allowing Pena Nieto to press on with his energy reform, the tax overhaul, and efforts to spur greater competition in the telecommunications sector dominated by tycoon Carlos Slim.

The energy reform, which seeks to end the nationalist discourse followed by Mexico since foreign oil majors were expropriated in 1938, is particularly contentious.

Moving towards the PRD on taxes may help defuse leftist resistance to the energy plan, but it risks opening up a rift between the president and the PAN, which many analysts view as Pena Nieto's natural allies on economic reform.

PAN leader Madero praised parts of the fiscal plan, but was worried the government could be losing its budgetary discipline after it said it planned a deficit of 1.5 percent of GDP for 2014.

"In the PRI's hands, debt has never worked out well ... Deficit is a euphemism for debt," Madero told Reuters. "Half this reform is financed with a deficit."

Other lawmakers were more critical in the PAN, which has been deeply divided this year. Senator Javier Lozano called the reform "disappointing" and he lashed out at Madero on Twitter for "applauding like a seal" as the plan was presented.

Others in the PAN have gone further, calling the reform an attack on the middle class.

The PAN ended the PRI's 71-year rule of Mexico in 2000, governing until last year. The latter years of PRI rule were blighted by spells of economic mismanagement that resulted in two major debt crises in 1982 and 1994-1995.


Pena Nieto's fiscal reform is a keystone of his plan to raise economic growth to around six percent per annum after Mexico spent years underperforming Latin American peers.

For months PRI officials said they expected the plan to include broadening sales tax on food and medicine, especially after the PRI changed its manifesto in March to allow it.

The retreat from that idea prompted criticism that the fiscal plan will not do enough to address Mexico's chronically weak tax take, one of the lowest in the Americas.

"To us, this reform seems to fall short," said Luis Sanchez Galguera, a tax expert at accounting firm Deloitte, adding that the bill did not do enough to tackle the huge informal economy.

Instead, Sanchez Galguera said the bill, that raises the top rate of income tax to 32 percent from 30 percent for people earning above 500,000 pesos a year, relied too heavily on "captive taxpayers" who have always shouldered much of the burden.

However, taxing Mexicans at the other end of the spectrum is politically complex. Nearly half the population live in poverty, a figure that has not improved significantly in three decades.

Ratings agencies said they still had to study the plan to determine how it might boost Mexico's creditworthiness.

Moody's said it was "credit positive" but Standard & Poor's questioned the government's failure to widen sales taxes.

"It's not as bold as if you had added a (sales tax) on food and medicine," S&P credit analyst Lisa Schineller said.

(Additional reporting by Alexandra Alper, Dave Graham, Liz Diaz and Michael O'Boyle; Editing by Tim Dobbyn)