Originally posted at www.latimes.com:
Mexico plan to boost welfare spending raises concerns
The proposal may boost Pena Nieto’s populist credentials, but fiscal conservatives fear deficits.
MEXICO CITY — With a new fiscal reform proposal that tacks decidedly left, Mexican President Enrique Peña Nieto appears to be seeking to cool the ardor of progressive critics who have taken to the streets by the thousands to protest his ambitious reform agenda and accuse him of being unconcerned about the plight of the poor.
The plan, which the president unveiled Sunday night, seeks to boost welfare spending and shield the poor from tax increases by continuing to exempt food and medicine from a value-added sales tax, or VAT. Though it may serve to burnish Peña Nieto’s populist credentials, it is also causing concern among fiscal conservatives who remember how profligate spending by his Institutional Revolutionary Party, or PRI, was a factor in numerous financial disasters the nation suffered under its past rule.
“Mexicans have already learned that indebtedness is a false exit and if it is irresponsibly managed, it can result in a bust,” said a statement released Monday by the conservative National Action Party, or PAN.
The president Sunday referred to his package as a “social reform” that would create a progressive tax structure and expand the Mexican social safety net. Though PRI leaders had hinted earlier that the package would include a VAT for food and medicine, the president said he chose not to include those tax hikes because the Mexican economy was growing “less than expected.”
“At this moment, it would have an adverse effect on consumption and the welfare of the people,” he said.
The idea that Peña Nieto planned to raise taxes had become a key talking point of his most vocal critic, Andres Manuel Lopez Obrador, the leftist leader who ran second in the 2012 presidential election. On Sunday morning, roughly 50,000 Mexicans joined Lopez Obrador in a rally downtown to protest another major Peña Nieto proposal that seeks to open the struggling national oil company, Pemex, to foreign investment.
Proponents of the energy proposal say it is crucial to boosting Pemex’s declining production — and also necessary for Mexico’s overall economic health, since the company provides a third of the government’s revenue. Critics like Lopez Obrador see it as selling off the country’s most important natural resource.
In his speech, Lopez Obrador warned, as he has many times previously, that the president was going to have to raise taxes to make up for the oil revenue that would, under the energy proposal, go to foreign companies rather than government coffers.
“They are proposing that Mexicans pay the bill for the delivery of petroleum profits to foreigners,” he said.
Peña Nieto is hoping his fiscal plan will boost revenue in a country that collects less than any other nation in the 34-member Organization for Economic Cooperation and Development. But in place of the VAT on food and medicine, he proposes closing a number of business tax loopholes; taxing stock market gains; and raising income taxes on Mexicans making $38,000 a year — from 30% to 32%.
Overall, it appears that the president is hoping to place the burden of new revenue largely on businesses, rather than on the working and middle classes, said Rogelio Ramirez de la O, a Mexico City economist who has advised Lopez Obrador on economic issues.
At the same time, Peña Nieto has proposed expanding the social security system to cover more older Mexicans, and creating a new unemployment insurance program — both of which were proposals supported by Lopez Obrador.
Ricardo Aleman, a columnist for the newspaper El Universal, wrote Monday that these stances had created a “severe dilemma” for Lopez Obrador and the president’s other critics: How, he said, could they now “summon society to combat and reject proposals that the left has championed for decades?”
Lopez Obrador recently broke from the main leftist party, the Democratic Revolution Party, or PRD. On Sunday evening, PRD leader Jesus Zambrano hailed Peña Nieto’s budget for “putting the accent on the grand themes of social inequality.”
Both Zambrano and Gustavo Madero, the head of the conservative PAN party, accompanied the president as he announced his plan Sunday night; both parties have entered with the PRI into a “Pact for Mexico” that seeks agreement on the basic outlines of various reforms.
But while Madero applauded on Sunday, his party a day later issued its statement raising concern about spending. Under the two PAN presidencies, from 2000 to 2012, low deficits were considered major achievements after the deficit-fueled crises the country suffered during the PRI years, most recently with the peso crash of 1994.
Peña Nieto promised a balanced budget for 2013 when he took office in December. Under the new program, he said, the deficit would rise to 0.4% of gross domestic product for 2013, and 1.5% of GDP for 2014.
Those numbers are in line with previous deficits under the PAN. But Ramirez, the economist, said that with all of the programs Peña Nieto is proposing, his team may soon run up an even greater deficit — unless they add the VAT to food and medicine.
“I don’t see any other way for them to do it,” Ramirez said. “I really don’t.”
Sanchez is a news assistant in The Times’ Mexico City bureau.