VZCZCXRO0110
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #2764/01 2542226
ZNR UUUUU ZZH
P 102226Z SEP 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 3243
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/CDR USNORTHCOM
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHEHAAA/NSC WASHINGTON DC

UNCLAS SECTION 01 OF 03 MEXICO 002764 
 
SENSITIVE, SIPDIS 
 
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 (RACHEL JARPE, ANNA JEWEL) 
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH, ALOCKWOOD, GWARD 
NSC FOR DAN FISK 
STATE PASS TO USTR (EISSENSTAT/MELLE) 
STATE PASS TO FEDERAL RESERVE (ANDREA RAFFO) 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PINR ENRG PGOV MX
SUBJECT: CALDERON SUBMITS 2009 BUDGET TO CONGRESS; SPENDING ON 
SECURITY AND SOCIAL PROGRAMS ARE UP 
 
Summary 
------- 
 
¶1. (U) With oil revenues down, President Calderon submitted a 2009 
federal budget proposal that increases spending on security and 
social programs. The proposed budget, presented to the Chamber of 
Deputies on Sept. 8, rose by 5.7 percent in real terms over the 
budget approved in 2008.  Spending for security and social 
development programs, Calderon's top priorities, significantly rose 
by 33 and 6 percent respectively. With oil output and revenue 
declining, the government is cutting gasoline subsidies gradually. 
The budget proposal does not yet incorporate the energy reform 
currently being discussed in the Congress.  For the first time in 15 
years, the budget does not include changes to the tax system. A 
major challenge for the administration will be to improve its timely 
execution of expenditures in 2009, especially those for 
infrastructure.  End summary. 
 
Economic outlook for 2009; decline in oil output noted 
--------------------------------------------- --------- 
 
¶2. (U) Calderon's 2009 budget is based on assumptions of 3 percent 
real GDP growth, annual inflation of 3.8 percent, with an average 28 
day-CETES rate of 8 percent, a current account deficit of 1.1 
percent of GDP, and a Mexican oil mix price of $ 80.3 per barrel as 
determined by a formula set in the Budget and Fiscal Responsibility 
Law enacted in 2006 (Note:  The Finance Secretariat is expecting an 
average Mexican oil mix price of $ 96.50 per barrel in 2009. End 
Note).  A decline of 3.8 and 8.6 percent in oil production and 
exports are expected for 2009 to total 2.75 million and 1.33 million 
barrels a day, respectively, largely due to the drop in Cantarell 
field's output.  The Finance Secretariat (Hacienda) explains that 
the decline in Cantarell's production will be partially offset by 
the expected output increase in other fields, such as 
Ku-Maloob-Zaap. 
 
Budget proposal is balanced 
--------------------------- 
 
¶3. (U) Consistent with the Budget and Fiscal Responsibility Law, the 
Executive sent a balanced budget, which includes the revenue and 
spending bills.  Expenditures and revenue total 2.82 trillion pesos 
(US$ 269 billion), a 5.7 percent increase over the budget approved 
in 2008, but only 0.4 percent higher than the estimated budget to be 
actually exercised in 2008 (US$ 268 billion).  Proposed programmable 
expenditures are 2.11 trillion pesos (US$ 202 billion), up 6.3 
percent from 2008 in real terms and the highest ever approved in 
Mexico's history. 
 
¶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), which includes 
off-budget items, such as the banking and highway bailouts - will be 
equivalent of 2 percent of GDP.  The historical balance of the 
Public Sector's Borrowing Requirements (HBBR) will be equivalent to 
30.5 percent of GDP.  (Note: HBBR is the public sector's net total 
debt measured by the net stock of liabilities that result from 
subtracting total available financial assets from total liabilities. 
 End Note) The 2009 budget proposal considers a results-based 
budgeting process, as well as performance evaluations and compliance 
measurements of government programs' goals.  For the first time 
ever, Calderon is proposing multi-annual investment budgets for 
infrastructure projects aimed at propelling the National 
Infrastructure Plan (NIP). 
 
Top priorities are security and social development 
--------------------------------------------- ----- 
 
¶5. (U) The public spending strategy for 2009 will focus on security 
and justice, and social development, health and education.  The 2009 
budget includes more funds for overall expenditures for security and 
justice to fight organized crime and kidnapping, and social 
development to tackle poverty.  Overall expenditures for security 
and justice will grow by 32.9 percent in annual terms. Spending in 
 
MEXICO 00002764  002 OF 003 
 
 
social development programs will rise 6 percent in annual terms. 
 
6.(U) The 2009 budget for the Public Security Secretariat, the 
Attorney General's Office, the National Defense Secretariat and the 
Secretariat of the Interior will be increased by 49.8, 29.2, 16.1 
and 25.1 percent in real terms, respectively.  The Social 
Development Secretariat will see its budget grow by 25.9 percent in 
annual terms and the National Council of Science and Technology's 
budget will register an increase of 24.7 percent.  On the other 
hand, budgetary resources for the Secretariats of Communications and 
Transportation, Agriculture, Tourism and Environment will be reduced 
by 19.9, 9.4, 4 and 2.5 percent, respectively. 
 
No tax changes in 2009 
---------------------- 
 
¶7. (U) For the first time in 15 years, the 2009 budget will not 
include changes to the tax system or "Miscelanea Fiscal" as it's 
known in Mexico, because the government is still implementing the 
changes approved in last year's fiscal reform package.  Under this 
reform, for instance, the single corporate tax rate (IETU) will 
increase from 16.5 percent in 2008 to 17 percent in 2009.  Also, 
collections from the tax on cash bank deposits implemented in July 
are expected to grow by 147.4 percent.   Moreover, the Tax 
Administration Service (SAT, the rough equivalent of the IRS) will 
continue simplifying the system to make it easier for taxpayers to 
fulfill their obligations, as well as implement tools to tackle tax 
evasion. 
 
Proposed energy reform not factored into budget 
--------------------------------------------- -- 
 
¶8. (U) The economic package does not yet include any changes related 
to the energy reform currently being discussed by the Congress. 
Once Congress approves the reform, legislators will have to 
incorporate the changes to the revenue bill.  The energy reform is 
expected to be approved before October 20, when the Chamber of 
Deputies must approve the revenue bill.  The Senate must approve it 
no later than October 31. The spending part of the package must be 
approved by the Chamber of Deputies no later than November 15. 
 
Infrastructure budget and off-budget resources 
--------------------------------------------- - 
 
¶9. (U) It is worth noting the 19.9 percent reduction in the 
Secretariat of Communications and Transportation's (SCT) budget this 
year, which is partially explained by the significant resources SCT 
has received in the past and the additional resources it is expected 
to obtain from the launch of pending highway bids.  The government 
will also be able to execute multi-annual budgets for projects 
included in the National Infrastructure Plan.  The government's goal 
is to invest the equivalent of 5 percent of GDP in the coming years, 
which is expected to be accomplished via budget resources: direct 
allotments and long-debt investment instruments Pidiregas, and 
off-budget resources.  The Secretariat of Communication and 
Transportation has also embarked on a major investment plan that 
involves public-private partnerships included in the National 
Infrastructure Plan (NIP). 
 
Comment 
------- 
 
¶10. (SBU) To some extent, the 2009 budget is more austere than in 
other years given the expected decline in oil output,  crude oil 
price and increasingly expensive gasoline imports.  As a result, the 
government has announced its intention to gradually cut gasoline 
subsidies in half by 2010.  The increase in public security and 
social development is fully consistent with Calderon's public pledge 
of fighting narco-trafficking and organized crime, and of tackling 
Mexico's stubborn poverty rate. 
 
¶11.  (SBU) A major challenge for the administration will be to 
improve the timely execution of expenditures, especially those for 
infrastructure.  For the past two years, the federal government has 
 
MEXICO 00002764  003 OF 003 
 
 
found this difficult due to a poor of planning, bureaucratic 
procedures, and delays in signing execution agreements with local 
governments for the use of federal resources and land.  We expect 
Congress to likely perform some surgery on Calderon's budget to 
funnel more resources to highway infrastructure, support payments to 
the agricultural sector, and a reduction of social development 
funds.  End Comment.