Mexico Taps Oil Reserve Fund to Cover Deficit

Mexico tapped deeply into its $840-million reserve fund of oil proceeds in the first quarter to cover costs as tax increases failed to meet expectations and government spending rose.

Mexico withdrew from the fund for the first time since it was created in 2000 as the first-quarter budget deficit widened after the government overestimated the country’s growth prospects and its ability to collect new taxes. Mexico had reported a surplus in the first quarter each year since 1990.

The government pulled $726 million from its $840-million Petroleum Revenue Stabilization Fund, which was set up to provide the country with a financing cushion after oil sales soared in 1999, the Finance Ministry said.

The use of the fund underlines the difficulties President Vicente Fox is having in diminishing Mexico’s reliance on oil revenue as its spending gap widens. His tax increase proposal was derailed by the opposition-controlled Congress last year, and analysts say he may be forced to attempt new spending cuts to shore up finances.

“There will definitely have to be some corrections on problems we didn’t foresee,” said Manuel Minjares, a lower-house deputy from the president’s National Action Party who served on the congressional tax commission.

Total tax revenue in the first quarter rose 8% to $20 billion. Still, the increase missed government estimates by $1.5 billion.

The shortfall occurred as gross domestic product shrank 1.6% during the quarter.

The government had expected the economy to recover from a recession that began in late 2000, and it increased spending by 1.8% from the same period last year to spur a revival.

“The changes to the tax structure weren’t substantive,” said Lawrence Krohn, chief economist for Latin America at ING Barings Corp. “Combine that with a weak economy, and you get a tax disappointment.”

Collection also fell short as attempts to raise revenue by taxing leather goods, sports cars and jewelry backfired. The government collected $23 million from the luxury tax, or 10% of what was promised when tax legislation was passed last year. Fox was forced to exempt Mexico’s border states from the tax as consumers left the country to buy goods in the U.S.

Already, the government has announced plans to cut spending by $1 billion this year. Economists said more cuts may be needed to maintain the government’s target deficit of 0.65% of GDP.