Tight Mexican budget proposals go before Congress

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Mexico's Treasury department yesterday submitted a tight budget for 2005 to Congress, calling for the public sector deficit to drop to 0.1 per cent of gross domestic product, down from 0.3 per cent this year.

Arguments over the budget, which must be set by the end of December each year, have divided President Vicente Fox and Congress in the past three years. In 2001 and 2003, the administration was defeated over attempts to extend value-added tax to food and medicine.

However, there has been cross-party consensus on the need for a tight budget, and the deficit has fallen as a proportion of GDP each year. Francisco Gil Diaz, the Treasury minister, also retains powers to make spending cuts during the year if there is a risk that the deficit target will not be met.

Analysts worried that this budget, which is based on the assumption of a sharp fall in the oil price, could also provoke opposition in Congress.

Assuming that Mexico will earn $23 per barrel, down from $29.20 per barrel at present, the Treasury is projecting that its income will be 21.6 per cent of GDP next year - 1.7 percentage points below its level this year. It is also expecting a slight decrease in non- petroleum revenue, of 0.1 per cent of GDP due to the fall in revenue from tariffs following various free trade agreements.

This will require a drop in the government's operating expenses of 11.8 per cent in real terms, a figure that implies significant job losses for civil servants. Rogelio Ramirez de la O, an economist at Ecanal, a Mexico City consultancy, said he thought the Treasury's predictions were "sensible," but their presentation could provoke opposition in Congress.

"The scenario of falling oil prices for Mexico would be totally disastrous," he said. "Reflecting that in the budget to be discussed with Congress is a total non-starter because Congress hasn't seen the oil crisis yet."

Mr Fox defended the proposals. "We must avoid crises, devaluations or high rates of inflation," he said. "Therefore we are planning a budget that makes deficit reduction its central point. We inherited a deficit of more than 1 per cent of GDP from the previous administration."

Spending priorities to be protected in the budget include public security (scheduled to rise by 22 per cent in real terms), health (up 10 per cent, aimed at the poorest families) and poverty reduction (up 9.8 per cent).

Infrastructure investment will rise by 3 per cent in real terms, under the current plan, including a 52.7 per cent increase in spending on motorway construction, and a 4.5 per cent increase in housing spending.

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