Carstens responds to critique of economic policy

Finance Minister Agustín Carstens responded vigorously to the comments made earlier in the week by Nobel prize winning economist Joseph Stiglitz.  Speaking at a conference in Mexico, Stiglitz said that Mexico’s response to the global financial crisis had been “unusual” with a “relatively weak” fiscal stimulus in contrast to the actions of many other countries. He added that Mexico needed to diversify its exports, and that relying on economic recovery in the U.S. was unlikely to result in a strong recovery since the world’s growth is concentrated in Asia.  Stiglitz also said the government need to invest not only in infrastructure but also in technology, education, and programs for improving economic opportunity. Carstens responded by noting that the government had to respond to the twin crises that hit Mexico­–the global recession and the 800,000 b/d decline in oil production. “We did not have the option of contracting more debt. One has to act responsibly, and this is what President Calderón decided and did,” Carstens said. Economy Secretary Ernesto Cordero said that Stiglitz “needed to read a bit more on Mexico” before making comments. The Templo Mayor column observed: “Wow. Looks like the Minister of Finance has decided to celebrate the anniversary of the Revolution by shooting at Nobel Prize winners.” (Universal 11/19, 11/20, Reforma 11/20)

Revenue bills pass Chamber

After stopping the clock at midnight of the statutory deadline, the Chamber of Deputies passed the five revenue bills. The key vote was 415 to 24, with all parties voting in favor except the PT and Convergencia. The Chamber rejected the government’s proposed 2% anti-poverty sales tax and instead raised the value added tax rate by 1% to 16%, leaving food and medicine exempt. The Chamber approved the government’s other tax proposals: a temporary increase in the income tax rate to 30%, a 3% tax on Internet and other telecoms services; a 1.5% increase in excise taxes on tobacco and alcohol; a 1% hike in the tax on large cash deposits in banks; and an increase in tax on gambling earnings.  The Chamber’s bills increase the target deficit by 0.2% to 0.7% of GDP. Finance Secretary Agustín Carstens estimated the package would raise Ps. 136 billion in tax revenues. He called it “a good package” and added, “given the circumstances, it is the best agreement possible.” (Reforma 10/22).

Quick move to offer generous indemnities to workers

Finance Secretary Agustín Carstens and Labor Secretary Javier Lozano announced that the government would offer redundant LFC workers up to Ps. 20 billion in indemnities, about 25% more than the law requires. (LFC’s annual deficit, which is covered by the government, is more than Ps. 40 billion.) The average worker would get a payment equal to 2-1/2 years’ salary and benefits. Workers have one month to decide if they will accept the government’s offer. Carstens estimated that about 10,000 of LFC’s 43,000 active workers could be re-contracted to work at the new company. The 20,000 retirees will continue to receive their current pensions. (Reforma 10/12)

Carstens defends new taxes

Finance Minister Agustin Carstens defended the 2010 budget plan, with its tax increases, before a hostile Chamber of Deputies. Carstens said that the financial markets would not finance a higher deficit, given the permanent reduction in oil export volumes. He said the proposed 2% anti-poverty tax would enable a major expansion of anti-poverty programs such as Oportunidades and food assistance, and said that for every peso the poor paid in higher taxes, they would receive back ten in social program benefits. Congressmen from the PRD, PT, and Convergencia unveiled a massive 12-meter banner while Carstens spoke that read, “No to the 2% Value Added Tax.” (Reforma 9/16)

Budget blends new taxes, spending cuts, and deficit financing

Finance Minister Agustín Carstens presented the government’s budget for 2010. The highlight was a new 2% “Contribution to Alleviate Poverty,” assessed on the value of all goods and services, with the proceeds dedicated to increased funding of anti-poverty programs.  Other tax increases, including a 2% increase in the maximum income tax rate, a new 4% tax on telecommunications services, an increase in the tax on cash bank deposits, and higher excises are intended to offset the permanent decline in expected oil revenues. Total government programmable spending would be reduced by 3.4%, including the absorption of the Ministries of Tourism, Agrarian Reform, and Public Function by other agencies. The Public Sector Borrowing Requirement was pegged at 3.1% of GDP for 2010, with plans to return to balance by 2012. (Hacienda 9/8)

Carstens declares Mexico to be in ‘financial shock’

In statements before the Senate and the PAN congressional delegation, Finance Secretary Agustín Carstens declared that Mexico’s public finances were facing the worst “financial shock” in 30 years, and that the 2010 budget would have to solve a budget gap of Ps. 300 billion.  Asked about tax increases, Carstens said, “We’ll see on September 8,” when the government presents its budget proposal. Speaking to reporters during his state visit in Colombia, President Calderón said, “The truth is that in order to close the gap in public finances we need to reduce spending or increase public revenues or allow a deficit.… It seems to me that we need to find the best combination of the three alternatives.” (Universal 8/12, Reforma 8/13, 8/15)

Hacienda preparing new fiscal reform package

Finance Secretary Agustín Carstens announced that the government will present a new fiscal reform as part of the 2010 budget package. “Yes, we are thinking of the need to increase tax revenues through a tax reform. The specific measures have not yet been determined, and will be presented with the new package [in September],” he said as he announced a new round of modest spending cuts to bridge the gap created by this year’s decline in tax and oil revenues. Carstens said that this year’s gap was mostly being filled by tapping contingency funds, the oil price hedge, and other measures, but that these will not be available next year. (Universal 7/24, Reforma 7/24)

Finance Secretary under fire

The publication Mexican GDP figures – a decline of 8.2% in the first quarter – and another reduction in GDP estimates for 2009 (to -5.5%) is undercutting the standing of Finance Secretary Agustín Carstens. The Bajo Reserva column asks,

“Who is making the official estimates [for GDP growth], and how is it possible to have a correction of 6 percentage points in GDP forecasts in only 15 weeks? …No other economy has had to make such a correction of this magnitude in its forecasts. It would seem that the management of numbers … is not a strong point of this Government.”

Two of the most sober columnists, Leo Zuckermann and Sergio Sarmiento, had columns on the same day questioning Carstens’ effectiveness, with both quoting his February 2008 statement about the impact of the U.S. economic recession on Mexico:

“I am confident that it will not give us pneumonia. I expect that it will give us a cold.”

Sergio Sarmiento, who has long been a critic of the adequacy of economic policy, noted:

“Today nobody talks of a ‘cold’ except in jest. If we want to continue with the metaphor, I imagine that the U.S. is suffering from an atypical pneumonia while Mexico is suffering from a case of H1N1 flu that hasn’t been treated in time.” (Reforma 5/22)

Leo Zuckermann catalogs all of Carstens’ statements about the economy from February 2008 on, along with the steady reduction in GDP expectations from 4% growth to the current forecast of a 5.5% contraction.

“I understand that the Finance Secretary is providing an optimistic vision of the economy in order to not deepen the economic fear. However, I believe that Carstens has abused optimism to the detriment of realism. He has consistently erred in his forecasts, and with this he has lost the credibility that a serious secretary of finance has to have. Taking into account Carstens’ past performance, can we truly believe that the Mexican economy will only fall 5.5% in 2009? (Excelsior 5/22)