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Mexico’s Congress debates polemic fiscal reforms

October 23, 2013

Mexico’s lower house, the Chamber of Deputies, approved fiscal reforms which include the introduction of value-added tax (IVA) on junk food and soda last Friday. The controversial bill was then introduced to the Senate on Tuesday, where it faces a tricky ride and must be voted on by October 31.

The package pushed by President Enrique Peña Nieto also includes the imposition of 16-percent IVA on food for pets – which animal-rights groups have warned will lead owners to abandon their cats and dogs – but a broadly unpopular proposal to tax private education has been dropped.

Under the proposed legislation, sugary drinks will rise in price by one peso per liter, the price of high-calorie foods (defined as those with over 275 calories per 100 grams) will rise by five percent, and tax on chewing gum will go up by 16 percent. The government says the aim of these taxes is to fight obesity, as Mexico is the number-one consumer of Coca-Cola products and recently overtook the United States to become the most obese of the world’s largest nations.

While health experts, including the World Health Organization, have applauded the proposed measures, business leaders have protested, concerned by the possibility of diminished profits and consequent job losses.

Emilio Herrera, president of the National Association of Soft Drinks Producers (ANPEC), warned on Tuesday that taxing sugary beverages will cause a decrease in sales and a decline in production, leading the industry to lay off 10,000 employees immediately and other 20,000 in the medium term. Aside from drinks producers, sellers – who receive around 30 percent of profits from sales – will also be hit hard by the tax, Herrera said.

The private sector has also called for the reforms to include a firm, fixed limit to the public deficit. Raising taxes will do little to help the federal government increase revenue if the deficit is not reduced, Luis Foncerrada, director of the Center for Economic Studies of the Private Sector (CEESP) argued this week.

While the fiscal reforms could bring in an additional 240 billion pesos (1.4 percent of GDP), the deficit next year will reach 721 billion pesos (4.1 percent of GDP), Foncerrada said. This will mark the most significant deficit in 25 years, since it reached 4.6 percent in 1989.

“This certainly puts pressure on finances,” Foncerrada said. “It’s very important that we impose an absolute limit on borrowing in the Senate now.”

Proposed by the incumbent Institutional Revolutionary Party (PRI), the reforms received the support of the New Alliance Party (PANAL), the Green Party (PVEM) and even the leftist Party of the Democratic Revolution (PRD) in the Chamber of Deputies. The latter only supported the bill after the PRI agreed to drop plans to tax food and medicine. The PRD was also placated by the PRI’s initiative to introduce unemployment insurance and universal pensions for those aged over 65.

The business-friendly National Action Party (PAN) remains firmly opposed to the reforms, which it says will hit the middle classes the hardest, while the leftist Labor Party (PT) and the Citizens Movement also voted against the bill in the lower house.

PAN President Gustavo Madero described the reforms as “very toxic” this week, while Jorge Luis Preciado, the PAN’s coordinator in the Senate, vowed to impose “enough pressure” to ensure that the bill is modified and becomes “less harmful to Mexicans.” Preciado added that the PAN is opposed to the tax on pet food, particularly in the cases of the estimated 500,000 blind people who are reliant upon guide dogs.

The PRI needs the votes of 65 senators to pass the reforms without further modification; it can currently count upon 61 votes, including the support of the PVEM. If the PRI can maintain the existing alliance from the Chamber of Deputies together then it will be able to pass the legislation unchanged, but it may struggle to keep the PRD onboard unless it bows to pressure to limit the state deficit and drop plans to raise IVA in border areas from 11 to 16 percent.

Marcelo Ebrard, the popular former mayor of Mexico City, has voiced frustration at his party’s present support for the PRI, arguing that the PRD should represent its supporters and oppose the government or risk losing votes.

“There may be some issues or initiatives on which we agree with the government, but what we are seeing right now is the party backing the government’s initiatives extremely closely and that seems very negative to me,” Ebrard said.

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