VZCZCXRO3136
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #4871/01 2531921
ZNR UUUUU ZZH
P 101921Z SEP 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 8812
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUEHC/DEPT OF LABOR WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 MEXICO 004871 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR A/S SHANNON 
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, AND DRL/AWH 
STATE FOR EB/ESC MCMANUS AND IZZO 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD 
USDOC FOR ITS/TD/ENERGY DIVISION 
TREASURY FOR IA (ALICE FAIBISHENKO) 
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND ALOCKWOOD 
NSC FOR RICHARD MILES, DAN FISK 
STATE PASS TO USTR (EISSENSTAT/MELLE) 
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA) 
 
E.O. 12958: N/A 
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: CALDERON SENDS MEXICO'S 2008 BUDGET PROPOSAL TO 
CONGRESS 
 
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Summary 
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¶1. (U) President Calderon presented his 2008 federal budget 
proposal to the Chamber of Deputies on September 8, 2007. 
The $220-billion spending plan is based on assumptions of 
3.5% real GDP growth, inflation of 3.0%, a Mexican oil mix 
price of USD 46.60 a barrel, and an average nominal exchange 
rate of 11.3 pesos to the dollar.  The proposal does not 
incorporate a tax reform package currently being considered 
in Congress, but if the initiative passes as expected, the 
government can amend the budget to reflect an estimated USD 
10.6 billion (1.1% of GDP) in additional revenue.  The 
government has said it will spend the additional USD 10.6 
billion on infrastructure and social projects. 
 
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Fiscal Reform Missed First Deadline 
----------------------------------- 
 
¶2. (U) President Felipe Calderon submitted his government's 
2008 federal budget proposal to the Chamber of Deputies 
(lower house) on September 8.  The budget proposal does not 
include additional revenue from a pending tax reform that the 
administration had hoped to pass before the budget draft was 
due to Congress.  Talks over the tax initiative stalled last 
week because of an impasse over an electoral reform bill, 
which the opposition insists be approved in tandem with 
fiscal reform.  Lawmakers have said they will resume debate 
on fiscal reform this week.  If the initiative passes as 
expected, the government can amend the budget to reflect the 
increase in revenue. 
 
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The Budget Proposal 
------------------- 
 
¶3. (U) In the spending plan, net expenditures total USD 220 
billion (2.39 trillion pesos) -- up 3.3% from the approved 
2007 budget but down 1.1% in real terms from an estimate of 
2007 spending.  Proposed programmable expenditures are USD 
163 billion, up 3.4% from the 2007 budget in real terms.  The 
budget assumes the following for 2008:  real GDP growth of 
3.5%, an average consumer price inflation rate of 3.0%, an 
average nominal exchange rate of 11.3 pesos per dollar, a 
current account deficit of 1.0% of GDP, and an average price 
of the Mexican crude oil basket of USD 46.60 per barrel 
($3.80 a barrel above the 2007 approved budget).  The plan is 
based on oil production and exports of 3.1 and 1.7 million 
barrels per day, respectively.  Budget calculations assume 
that the U.S. economy grows 2.8% and that U.S. industrial 
production expands by 3.1% in real terms next year. 
 
¶4. (U) The budget is balanced using the narrow definition of 
the budget balance, but the broader measure of the budget 
balance -- the Public Sector Borrowing Requirement (PSBR) -- 
is a deficit of 2.0% of GDP (vs. 1.7% in the 2007 budget). 
Interestingly, a September 8 press release from the Finance 
Secretariat (Hacienda) says tQat the public sector could end 
 
SIPDIS 
the 2008 budget year -- which coincides with the calendar 
year -- with a deficit because of one-time costs associated 
with the pension reform approved earlier this year.  The size 
of the deficit will be a function of how many workers choose 
to switch to individual retirement accounts from the existing 
defined-benefits pension system, something that will not be 
known until September 2008.  The Budget and Fiscal 
Responsibility Law requires the budget to be balanced except 
in extraordinary situations -- a category the government says 
pension reform fits. 
 
¶5. (U) According to Hacienda, the proposal reflects the 
 
MEXICO 00004871  002 OF 003 
 
 
objectives outlined in the administration's National 
Development Plan.  Specifically, it aims to increase the 
impact of social spending and foster productivity and 
employment, improve public security, encourage infrastructure 
development, increase resources designated to environmental 
protection, and continue efforts to make government spending 
more "austere" and more efficient.  When compared to the 
approved 2007 budget, spending on public security and law 
enforcement, social development, and economic development are 
up 8.1%, 2.7%, and 2.6%, respectively, in real terms.  Pemex 
and the Federal Electricity Commission can expect a real 
increase in their budgets of 5.3% and 4.3%, respectively. 
The Public Safety Secretariat's budget will increase by 
14.6%.  The proposal also includes a USD 933-million cut in 
the federal government's operational and administrative 
costs.  These funds will be reallocated to health, science, 
technology, and investment.  As in the past, the government 
expects to reduce net external public debt by at least USD 
500 million. 
 
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Government Highlights Importance of Fiscal Reform 
--------------------------------------------- ---- 
 
¶6. (U) During a press conference over the weekend, Calderon 
urged lawmakers to pass the pending fiscal reform bill, 
commenting that the current budget is "insufficient" to meet 
the needs of the country.  He said that additional funds 
would be used for infrastructure projects, higher education, 
health services, Pemex, and the Federal Electricity 
Commission. 
 
¶7. (U) Hacienda estimates that fiscal reform would generate 
US$10.6 billion (1.1% of GDP) in additional revenue -- of 
which around 70% would go to the federal government and 30% 
to federal entities.  According to the September 8 press 
release, the passage of fiscal reform would demonstrate 
Mexico's ability to improve its competitiveness, lead to more 
investment in infrastructure, lower interest rates and 
country risk, stimulate private investment, and 
boost economic growth from 3.5% to 3.7% next year.  Hacienda 
said that extra funds could be distributed as shown in Table 
¶1. 
 
Table 1.  Distribution of Additional Federal Income From 
Fiscal Reform 
 
Category                                        Million USD 
--------                                        ----------- 
Competitiveness and Job Creation                5,626 
      Infrastructure                            4,943 
        - Communication and transport           1,512 
        - Water                                   750 
        - Energy                                2,681 
      Reduction of electricity rates              683 
 
Human Development                               1,713 
      Hospital Infrastructure                   329 
      Strengthening IMSS (social security)      375 
      Support for poorer municipalities         275 
      Municipal public security                 329 
      Higher education                          404 
 
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Comment 
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¶8. (SBU) Post's initial impression is that the budget is 
austere and well thought out, though it is likely to be 
substantially modified.  The government's first draft is a 
negotiating ploy designed to expedite congressional approval 
of fiscal reform.  Post maintains that this legislation will 
 
MEXICO 00004871  003 OF 003 
 
 
be approved in time to be incorporated into the 2008 budget 
-- which we understand to be October 20, the deadline for the 
lower house to approve the income component of the budget. 
The tax package could be passed as early as this week, though 
problems with electoral legislation could delay it further. 
 
 
Visit Mexico City's Classified Web Site at 
http://www.state.sgov.gov/p/wha/mexicocity and the North American 
Partnership Blog at http://www.intelink.gov/communities/state/nap / 
GARZA