lunes, 9 de septiembre de 2013

Fiscal reform unveiled...

The fiscal reform unveiled last night by President Peña leaves businesses and the middle class cold. No wonder, since they'll be footing the bill.

In macro terms, the government plans to collect additional tax revenues equal to 1.4% of GDP. Half of that will come from additional income taxes collected from companies. Another 0.6% of GDP will come from additional personal income tax collections and IVA (half from each concept). IEPS (excise taxes) on gasoline and other products will contribute, respectively, 0.4% of GDP and 0.2%. On a net basis, the expected loss of income from eliminating the IETU will cancel out the additional income taxes businesses are expected to pay. The question, of course, is whether the same businesses that benefit from eliminating IETU will pay the additional income taxes.

Exports will have to be the motor of next year's growth, along with public sector spending. Consumers will quite simply have less disposable income after the tax bite.

The fiscal package itself was a surprise. The government floated trial balloons but the package itself was very tightly held. One surprise was the decision to abandon levying value-added taxes (IVA) on foods and medicines. It's said that the President himself made the call, one that was very much influenced by political calculations.

The other surprise was the reappearance of public sector deficits, excluding investments by Pemex. Hacienda is asking for approval to increase this year's deficit from the approved 2.0% of GDP (0.0% excluding Pemex investments) to 2.4% (0.4% excluding Pemex investments). Next year's deficit is to be 3.5% of GDP (1.5%, excluding investments by Pemex). Mexico's debt to GDP ratio remains enviable but there hasn't been the same commitment to reducing deficits that we saw in earlier Administrations. The deficit began creeping higher as a percentage of GDP in the Calderon Administration. "Deficit creep" has transcended the change of sexenio.

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