VZCZCXRO9620
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #6823/01 3412324
ZNR UUUUU ZZH
P 072324Z DEC 06
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 4510
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEHNSC/NSC WASHDC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUEHC/DEPT OF LABOR WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 MEXICO 006823 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR A/S SHANNON 
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA 
STATE FOR EB/ESC MCMANUS AND IZZO 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/ARUDMAN 
USDOC FOR ITS/TD/ENERGY DIVISION 
TREASURY FOR IA (ALICE FAIBISHENKO) 
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND SLADISLAW 
STATE PASS TO USTR (EISSENSTAT/MELLE) 
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA) 
NSC FOR DAN FISK, CYNTHIA PENDLETON 
 
E.O. 12958: N/A 
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: MEXICO'S CALDERON SUBMITS BUDGET TO CONGRESS 
 
REF: MEXICO 6157 
 
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Summary 
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¶1. (SBU) The new Mexican government of President Felipe 
Calderon, which took office on December 1, submitted its 2007 
budget proposal to the Chamber of Deputies on December 5. 
The $205-billion budget is based on assumptions of 3.6% real 
GDP growth, inflation of 3.0%, a Mexican oil mix price of 
$42.50 a barrel, and an average nominal exchange rate of 
11.20 pesos to the dollar.  The proposal reflects Calderon's 
emphasis on job creation, poverty reduction, and public 
security.  When compared to the approved 2006 budget, the 
proposal increases social spending by 6.9%, anti-crime 
spending by 12.4%, and transfers to state-owned energy 
company PEMEX by 32.5%.  Although the fiscal deficit 
increases from 0.8% of GDP in the 2006 budget to 1.6% in 
Calderon's proposal, the budget is fiscally responsible.  The 
budget does not include fiscal reform measures, but Finance 
Secretary Agustin Carstens has said a fiscal reform package 
 
SIPDIS 
is likely in 2007.  The proposed budget replaces the 
controversial 20-percent "beverage tax" on fructose-sweetened 
soft drinks with a 5-percent tax on drinks sweetened with 
either sugar or fructose syrup -- a move that Carstens says 
brings Mexico into compliance with a WTO ruling.  Although 
the current political environment will complicate the 
process, Calderon should be able to secure congressional 
approval of the budget without major difficulties before the 
December 31 deadline.  End Summary. 
 
------------------------ 
The 2007 Budget Proposal 
------------------------ 
 
¶2. (SBU) Finance Secretary Carstens on December 5 presented 
the newly installed Calderon government's 2007 budget 
proposal to the Chamber of Deputies.  Calderon has called the 
bill "realistic" and said it is based on expectations of an 
economic slowdown due to lower growth in the U.S. and a drop 
in Mexico's oil production.  The budget proposal assumes real 
GDP growth of 3.6%, consumer price inflation of 3.0%, an 
average nominal exchange rate of 11.2 pesos per dollar, a 
real interest rate (28-day Cetes) of 3.9%, a current account 
deficit of 2.3% of GDP, and an oil price estimate of $42.5 
per barrel for 2007.  The proposal balances the budget using 
the narrow definition of the budget balance (which excludes 
contingent liabilities), but the broader measure of the 
budget balance, the Public Sector Borrowing Requirement 
(PSBR), is a deficit of 1.6% of GDP.  This figure is up from 
the 0.8% of GDP deficit targeted in the 2006 budget. 
Proposed net expenditures total $205.0 billion, up 9.4% from 
the 2006 budget in real terms, while programmable 
expenditures total $149.7 billion, up 12.1% from 2006. 
(Note: total net expenditures actually fall by 2.9% in real 
terms when compared to actual 2006 spending.  End Note.)  The 
budget is based on the underlying assumptions of U.S. real 
GDP growth of 2.5% and a real expansion of U.S. industrial 
production of 3.0%. 
 
--------------------------------------------- ---- 
Emphasis on Security, Poverty Reduction, and Jobs 
--------------------------------------------- ---- 
 
¶3. (SBU) Calderon said publicly that the budget seeks to 
concentrate spending on programs oriented toward his 
administration's three priorities:  public security, the 
fight against poverty, and job creation.  Calderon -- who is 
under pressure to focus more heavily on poverty alleviation 
to earn the support of the millions of Mexicans who voted for 
his leftist opponent -- increased spending on social programs 
by 6.9% in real terms.  Calderon boosted spending on public 
 
MEXICO 00006823  002 OF 003 
 
 
security by 12.4% in real terms compared with the 2006 
budget.  Among the administration's anti-crime initiatives 
are plans to establish a unified police force, create a 
technology-based criminal information system, and increase 
funds for counter-narcotics work.  The government, which 
expects oil prices and its oil production to fall in 2007, 
increased transfers to PEMEX by 32.5%.  The budget proposal 
also boosted spending on education by 4.2% and spending on 
health by 9.3% in real terms.  The largest spending cuts went 
to financial services (-20.9%), communications and 
transportation (-20.5%), sustainable development (-18.7%), 
and agrarian issues (-13.3%). 
 
--------------------------------------------- 
Reforms Notably Absent, But Promised for 2007 
--------------------------------------------- 
 
¶4. (SBU) The budget does not include significant fiscal 
reform measures, but during the presentation of the proposal, 
Calderon said that the budget would be accompanied by efforts 
to boost Mexico's chronically low tax collection, in part by 
simplifying the system.  During a television interview on 
December 6, Carstens said that the government likely would 
submit a fiscal reform package in 2007.  Carstens said that 
the government needs to increase revenues because of the 
pressure pensions put on government finances and because 
PEMEX needs significant investment over the next few years to 
maintain its export platform.  He said that without fiscal 
reform, the fiscal deficit would increase to 3% of GDP by 
¶2012.  Calderon earlier this week slashed salaries of senior 
officials in the executive branch by 10 percent -- including 
his own -- and cut expenses, such as office and telephone 
costs.  Calderon said the measures were intended to free up 
funds for social programs -- though some commentators noted 
that the move was also at least partially intended to show up 
his leftist opponents.  (Note:  Mexican government officials 
are some of the highest paid in Latin America.  End Note.) 
 
--------------------------------------------- ------------ 
Carstens Says Budget Resolves Dispute Over "Beverage Tax" 
--------------------------------------------- ------------ 
 
¶5. (SBU) The budget proposal included a measure that would 
replace the controversial 20-percent "beverage tax" on sales 
and imports of soft drinks that use sweeteners other than 
cane sugar with a 5-percent tax on sales and imports of all 
soft drinks regardless of which type of sweetener they use. 
Carstens said publicly that the change brings Mexico in line 
with a WTO ruling that demands the fructose soda tax be 
eliminated.  According to the local press, Mexican cane sugar 
producers reacted favorably to the proposal because it 
complies with the WTO ruling while not leaving them 
completely totally unprotected. 
 
---------------------------- 
Reactions to Budget Proposal 
---------------------------- 
 
¶6. (SBU) Financial markets performed well after the 
announcement of the budget, with the stock market continuing 
to post records and the peso recovering to 10.87 pesos per 
dollar.  HSBC's Juan Pedro Trevino and JP Morgan's Alfredo 
Thorne (strictly protect) agreed that the budget proposal is 
fiscally responsible and that Calderon and Carstens would be 
able to secure the budget's approval in Congress without 
major conflicts.  Both economists said that the budget was in 
line with their expectations, but expressed confusion about 
why the current account deficit assumption jumped from 0.3% 
of GDP in 2006 to 2.3% in 2007.  Trevino told Econoff that 
expectations of slower U.S. growth and lower oil revenues 
explained part of the jump, but he was at a loss to explain 
why the current account deficit worsened so much.  He also 
told Econoff that the increase in the PSBR deficit was a 
 
MEXICO 00006823  003 OF 003 
 
 
signal that Mexico needs fiscal reform to increase the tax 
base. 
 
¶7. (SBU) Local press reporting shows that complaints have 
already arisen regarding the amount of funds allocated to 
infrastructure, education, and agriculture.  Businessmen with 
interests in infrastructure development have complained about 
large spending cuts to the Secretariat of Communications and 
Transportation, arguing that the cuts will give advantage to 
foreign companies.  (Comment: it is possible that Calderon is 
looking to private-sector investment to help fill the gap. 
End Comment.)  The President of the lower house's Education 
Committee said publicly that he would push for more resources 
for the Secretariat of Public Education, saying that the 
budget allocations in Calderon's proposal are insufficient, 
particularly for higher education.  Local agricultural groups 
are protesting for additional resources. 
 
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Comment 
------- 
 
¶8. (SBU) Calderon's budget proposal did not include any major 
surprises, as it was in line with what the incoming 
government team has been saying for the past few weeks.  It 
focuses on Calderon's three key priorities of job creation, 
poverty alleviation, and public security.  While it 
represents a slight fiscal easing, it is fiscally 
responsible.  It appears that Calderon's strategy was to 
submit a relatively non-controversial budget in order to help 
build consensus in a difficult political environment during 
his first year in office.  Many analysts expect that he will 
start pushing reforms forward in 2007.  In this regard, one 
of Finance Secretary Carstens' key challenges will be making 
lawmakers understand the risks to the Mexican economy of 
failing to implement reforms. 
 
¶9. (SBU) Calderon should be able to secure congressional 
approval of the budget without major difficulties before the 
December 31 deadline.  This is due in part to the budget's 
emphasis on social spending, as well as the formula defined 
in the new fiscal responsibility law for calculating the oil 
price estimate.  That said, the "political factor" will 
undoubtedly complicate negotiations on the budget in 
Congress, especially after Calderon's chaotic inauguration 
ceremony last week.  (Note:  Self-declared "legitimate 
president" of Mexico Andres Manuel Lopez Obrador has proposed 
his own budget.  The document proposes federal spending of 
$193 billion and, like Calderon's budget, it cuts office 
expenses and allocates more funding for infrastructure and 
housing programs.  End Note.) 
 
 
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