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FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 8659
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC

230311
2009-10-19 18:58:00
09MEXICO3010
Embassy Mexico
UNCLASSIFIED//FOR OFFICIAL USE ONLY
09MEXICO2832
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DE RUEHME #3010/01 2921858
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FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 8659
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
TAGS: ECON EFIN ETRD ENRG ELTN EAIR PGOV PINR SENV
UNCLAS SECTION 01 OF 03 MEXICO 003010 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/MEX, WHA/EPSC, EEB 
NSC FOR RESTREPO, FROMAN 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GWORD 
TREASURY FOR NANCY LEE, IA 
ENERGY FOR WARD, LOCKWOOD AND DAVIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD ENRG ELTN EAIR PGOV PINR SENV
MX 
SUBJECT: 2010 GOM BUDGET: OPPOSITION REJECTS AND BUSINESS 
SUPPORTS TAX HIKES  
REF: MEXICO 2832 
 
¶1. (SBU) Summary.  Facing an October 20 deadline to approve 
the GOM's 2010 proposed revenue bill, PRI leaders, governors, 
and lawmakers met on October 12 to coordinate a consensus on 
the budget.  According to local press reports, PRI lawmakers 
revealed that they will reject the GOM's 2% anti-poverty tax 
proposal and propose to lower the telecommunications tax, 
increase the deficit to 0.75% (in lieu of the 0.5% proposed 
by the GOM), and raise the Mexican oil mix benchmark price to 
US$61 per barrel (instead of US$53.9 set by the GOM).  They 
will formally announce their proposal on October 19. The 
left-wing PRD is also rejecting the anti-poverty tax and has 
presented an alternative plan that also proposes a higher oil 
price, an increase in the deficit, as well as spending cuts. 
Mexico's leading business consortium, the Consejo Coordinador 
Empresarial (CCE), supports increases in income and 
consumption taxes, but demands a lower rate for new 
investments.  End Summary. 
 
PRI 
--- 
 
¶2. (U) On October 12, the PRI held a 4-hour meeting to 
coordinate a formal position on the GOM's economic plan. 
According to local press reports, PRI lawmakers revealed that 
they will take the following position, which they will 
formally announce on October 19. 
 
-- Reject the GOM's 2% anti-poverty tax proposal. 
-- Agreed to increase the special tax (IEPS) on beer, 
tobacco, gambling, the lottery, etc. 
-- In lieu of the 4% tax on telecommunications, they will 
propose an increase of 1.5 and 2%. 
-- Agree to increase the income tax (ISR), although they did 
not specify if it was from 28 to 30% as proposed by the GOM. 
-- Agree to raise the tax on cash deposits (IDE) to 3% and 
lower the floor on taxable deposits to MX$15,000 (from 
MX$25,000), as proposed by the GOM. 
-- Propose to increase the deficit 0.75%, in lieu of the 
0.50% proposed by the GOM. 
-- Propose to raise the benchmark Mexican oil price to US$61 
per barrel, instead of US$53.9 set by the GOM. 
 
3.(U) According to PRI estimates, their proposal would 
generate MX$375 billion enough to cover the GOM's estimated 
fiscal gap of MX$374 billion for 2010.  The PRI lawmakers 
interviewed also said the party agreed to increase the income 
tax because it would have a larger impact on the middle 
class, which is mainly the PAN's constituency. 
 
 
PRD 
--- 
 
¶4. (U) The PRD presented an alternative 2010 budget proposal, 
which proposes an additional MX$550 billion (US$41.77 
billion) in revenue. The PRD's proposal estimates that crude 
oil prices in 2010 would be US$57 per barrel, or US$3.1 
higher than the GOM's estimates, which would generate an 
additional MX$25 billion (MX$1.9 billion) in revenue. The 
PRD's proposal also contemplates an increase in public debt 
to 1.5% of GDP, generating an additional MX$180 billion 
(US$13.67 billion) to be spent on &productive investment and 
job creation.8  The PRD's plan also proposes MX$100 billion 
(US$7.6 billion) in cuts to the GOM's running expenses, 
MX$170 billion (US$12.9 billion) to be generated by 
eliminating special tax regimes, and MX$75 billion (US$5.7 
billion) from a tax on dividends. PRD Chairman Jesus Ortega 
explained that his party opposed plans for a 2% consumer tax 
which, he argued, would affect the poor and the middle 
classes. Furthermore, the PRD proposed that food and 
medicines remain tax free, and affirmed that the GOM,s plans 
to increase taxation would extend the economic crisis 
currently affecting Mexico. 
 
¶5. (U) Meanwhile, the movement led by former presidential 
candidate Andres Manuel Lopez Obrador is set to present two 
 
MEXICO 00003010  002 OF 003 
 
 
bills on austerity in the public sector, which aim to abolish 
the fiscal privileges of large companies and thus generate an 
additional 500 billion pesos ($38 billion) in public income. 
Lopez Obrador explained that his austerity bill proposed a 
50% salary cut for top-ranking officials, as well as the 
elimination of bonuses, major medical expenses, extraordinary 
payments, and special savings accounts for top-level 
bureaucrats. Furthermore, the bill would eliminate pensions 
for former presidents of Mexico, would cut publicity budgets 
within the public administration by 80%, and would mandate 
30% savings in telephone services, consultancy, computers, 
photocopies, stationery, and other supplies. Lopez Obrador's 
proposals will be defended by deputies and senators belonging 
to the Broad Progressive Front (FAP) -- formed by the PRD, 
the PT, and the Convergence Party. 
 
Private Sector 
-------------- 
 
¶6. (U) As budget negotiations continue, Mexico's leading 
business consortium, the Consejo Coordinador Empresarial 
(CCE), said that they are willing to accept the 28% to 30% 
increase in the income tax (ISR), but only if it is lowered 
to 25% for new investments or re-investments, which they 
consider an essential stimulus for the economy.  They also 
want to eliminate exemptions from the VAT and implement a 
generalized VAT by increasing it from 10% to 15% at the 
border.  The CCE also sent a letter signed by many 
associations, including the Mexican Banking Association, to 
lawmakers saying that they were unwilling to pay more taxes 
if the GOM did not reduce its current expenditures.  They 
complained that while the GOM was increasing taxes to captive 
taxpayers, it was increasing current expenditures by more 
than 5% and cutting public investment by 10%.  They also 
called for a reduction in political parties, budgets. 
 
¶7. (U) The business sector continues to be concerned about 
the GOM's proposed reform to the tax consolidation regime 
(see reftel).  They complain that the changes do not give 
legal certainty to investors and are an excessive fiscal 
burden particularly for exporters.  According to Hacienda, 
large companies only paid 1.7% of income tax (rather than the 
28%) due to fiscal consolidation and the existing income tax 
exemptions.  Deputy Secretary of Hacienda Alejandro Werner 
told lawmakers that the changes proposed in the income tax 
would generate MX$70 billion, 38% of which is from the 
proposed changes in fiscal consolidation. Note:  All parties 
have agreed on approving this reform. End Note. 
 
PAN 
--- 
 
¶8. (U) Responding to the CCE's complaint on political party 
transfers, PAN leader and lawmaker Cesar Nava proposed 
cutting these transfers in half so that political parties 
could raise a larger share of their resources from private 
organizations.  PAN senators also submitted an initiative to 
modify the Fiscal Coordination Law, so that states could 
collect more taxes on their own.  The initiative was 
accompanied by measures to make spending of public resources 
by the states more transparent. 
 
 
 
Recent GOM Actions 
------------------ 
 
¶9. (U) Meanwhile, the GOM has taken other actions outside of 
the budget/fiscal reform negotiations to accelerate public 
works projects and improve its fiscal position.  On October 
1, Calderon announced he would propose legislation that would 
accelerate plans to build highways and ports and encourage 
new investment to bolster the economy. The proposal would 
allow Mexico's pension funds (Afores), to buy stocks outside 
of indexes and take part in initial public offerings to 
channel resources to infrastructure projects. Pension funds 
could also participate in the offering of 
infrastructure-project trusts on the Mexican stock exchange. 
 
MEXICO 00003010  003 OF 003 
 
 
The proposal would cut bureaucratic hurdles to reduce the 
time it takes to carry out public works projects by 30 
percent, Calderon said.  He added that it may allow the GOM 
to announce 61 billion pesos in new projects by the end of 
2010, and to increase financing for projects by 125 billion 
pesos by 2012. 
 
¶6. (U) Also, on October 10, Calderon issued a decree ordering 
the liquidation of Luz y Fuerza (SEPTEL).  Federal 
Electricity Commission (CFE), Mexico's other state power 
company, will take over Luz y Fuerza del Centro, the smaller 
money-losing state power company.  According to SEGOB, the 
financial situation of Luz y Fuerza is unsustainable.  If Luz 
y Fuerza were left to continue, the GOM would have to 
transfer an estimated 300 billion pesos to the company by 
¶2012. 
 
 
Comment 
------- 
 
¶10.  Most governors do not want a confrontation with 
President Calderon, as it could be costly for all parties in 
the run-up to the 2012 elections.  According to the PRI 
lawmakers interviewed, State of Mexico PRI governor and 
current presidential front-runner Enrique Pena Nieto was 
among those  who supported the GOM,s 2% anti-poverty tax. 
He was also against raising the benchmark oil price, because 
if oil prices declined it would gravely affect states' 
finances (as it did this year).  (Note:  States receive over 
90% of their resources from the federal government which is 
determined through a special formula.    Oil hedge funds are 
not shared with the states. End Note.)  It would also mean 
bad news for governors and their candidates who face local 
elections next year, many of which are PRI-governed states. 
As the presidential front-runner, it is also in Pena Nieto's 
interest to take on the more difficult fiscal/tax reforms 
now, rather than have to deal with a fiscal quandary in 2012. 
 The PRI's counter-proposal achieves fiscal stability mainly 
by playing with the oil price assumptions and incurring more 
debt, but so far there is nothing in their proposal that 
would generate alternative revenue sources to replace their 
dependence on oil. 
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 / 
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