DrCTDifrrr% Report No. WH- 147 This report was prepared for use within the Bank and its affiliated organizations. Thv An nt nrnt rnntibility for its nerIrney or competeness. The renrt me, not be published nor may it be quoted as representing their views. TX"TDMKATIONAT RANT PO12 rCONSTU C)ION AmT) nPVPT nPMPMT T'TEPM JATTNATL TrVr-T -PMrNT A qqnCTATTON MEMORANDUM ON RECENT ECONOMIC DEVELOPMENTS IN MEXICO April 9, 1965 Western Hemisphere Department CURRENCY EQUIVALENTS i. bi. $ = 2. 49 pesos 1 peso (Mex$) = U. S. $. 08 1 million pesos = U. S. $80, 000 TART.. OF CONTTNTS Page T TIrrrTrT)T PTT( OT A. DCTAZ AGENCIES ..... ... ... . . . 8 t)r rhlV TM' nLqTVA nM/[l(7rr'Qcrnr1~1c . LEI THE PULIC SAVI. IPER FO.AC. . .. . . . C Z- T~ F iuO iI J.1.. . . . . . . . . ..a*a* AIN-H -OE NrUBLI F-lANIC NRL J1N5 DECENTRALIZED AGENCIES .. .. ........ 8 IV. PROSPECTS FOR 1965-66 AND WAYS OF IMPROVING THE PUBLIC SAVINGS PEFORmANCE . . . . . . 10 V. COMMENTS ON LONG RUN TAX STRATEGY . . . . . 16 APPENDIX ON EVALUATION OF THE YIELD EFFECT OF THE INCOME TAX REFORM STATISTICAL TABLES BASIC DATA Area: 760,000 square miles Population (mid-1964): 39.6 million (3.6 per cent annual growth rate) Gross National Product (1964): Ps. 224.6 billion Real rate of growth: Approximately 5 per cent in 1950's Average 1960-1963: 5.4 per cent 1964: 10 per cent Origin of Gross National Product Agriculture: 17 per cent (1964): Mining and Petroleum: 5 per cent Manufacturing: 114 per cent Construction: 14 per cent Other (mainly services) 50 per cent Gross Fixed Investment (1964): Ps. 36.6 billion 16.3% of GNP Government Finance (1964) Federal Revenue 17,450 (million pesos): Federal Expenditures 181916 Deficit -,1 Public Investment 16,500 (Estimated) Public Savings 9,902 (Estimated) Balance of Payments (1964) (US$ million): (Preliminary) Current Account -362.7 Exports 1,023.9 Tourism & border trade 72.7 (Credits) Imports -1,1487.6 Other -601.7 (net) Capital Account 504.2 Long term private 150.1 (net) Long term official 3148.0 (net) Short term 6.1 Errors and Cmissions -109.9 Chanies in Official Reserves 31.6 Money Supply (31 Dec. 19614): Ps. 27.1 billion 15.2 per cent increase since 12/31/63 Wholesale Prices (1954=100) (Dee.163)150.3 5.5 per cent increase since 12/31/63 Gross Foreign Exchanne Reserves 5714 (preliminary) - Equivalent of about (12/31/64) (USC million): four months payments on current account External Public Debt Outstanding (June 1964) including undisbursed (US$ million) 1,861.5 net of undisbursed 1,533.4 T TATIrPoTATTNPTAT 1T.1 X- 1IOArI' 111VnVI vl + -,.A.V office, a Bank mission visited Mexico to review with the authorities the Appraisal of the Development Program of Mexico (H-137a of July 1964), and to maodifPy, in thli ghtU of Uteedeobet s, Wte Pre-vius findinL-lGC2 regarding the prospects of the economy and the financial and other measures needed to maintain the rate of economde growuh desired by the MeLcUan Government. 2. The mission found that the main conclusions of the previous report regarding nthe basic flexibility and strength of the nexacan econUoMy all. the reasonableness of the target growth rate (5 to 6 percent) which the plan seeks to attain...," and Pexico's creditworthiness for new external borrowing remain valid, even though a numaber of specific events in 1964 turned out differently than had been expected. However, the unexpected deterioration in the public sector finances which occurred in 1964 under- lines the earlier conclusions that increasing public savings and additional prudence in resorting to borrowing which would increase Mexico's now heavy external indebtedness are critical to the preservation of Mexicofs credit- worthiness and to lexico's continued broad-based economic growth. 3. The conclusions of this brief report are preliminary in some essential respects, since the level and the content of the new Government investment expenditure plans are not yet known. The mission that visited Mexico in February 1965 found that the new Government had not yet finished its review of the public sector's expenditure plans, a review which, inciden- tally, has an unusually wide scope in 1965, since for the first time most of the decentralised public agencies must have their expenditures approved by the Ministry of Finance. It is expected that by April planning for the 1965 public investment program will be completed. However, the mission was able to obtain some information about its broad orders of magnitude, and about some decisions on priorities that had already been taken, as well as about the present state of project preparation, and was thus able to make some new projections for 1965. These projections, with which officials of the Nexican, Government agreed as to general orders of magnitude, indicate that in 1965 an adequate level of public investments (M$13.0 to 14.0 billion) can probably be financed without additional revenue measures provided a careful selection of priority projects is undertaken. Looking ahead, hoever, an additional public savings effort will be required to finance the public investment expenditure levels that Mexico's growing economy will require in the coming years. - 2 - II. RECENT DEVELOM1ENTS . In 1964, gross domestic product and gross national product rose about 10 percent in real terms and over lb percent in money terms (See Table 3). This was the highest growth rate in a decade and exceeded the average rate of the period 1951-63 by over 70 percent. The expansion was the result of the combined impact of a very favor- able agricultural year and of large increases in both private and public investment (See Table 4). 5. In December 1964, prices were 5.5 percent higher than in December 1963; not all of this, however, is attributable to the pressure of demand on resources, since some of the largest increases were due to poor crops of fruits (14 percent price rise) and vege- tables (29 percent price rise) which are produced mainly for export, and which - while a small part of total agricultural output - have a rather high weight in the wholesale price index. 6. The extraordinary rate of expansion achieved in 1964 was the result of some factors which cannot be expected to provide a continuing basis for growth at the same rate. The expansion in agri- culture will, in the future, have to depend more heavily on commodi- ties other than the cereals that provided the main impetus in 1964. As far as the expenditures for public investment are concerned, the unusual increase in 1964 was largely finnrnpd bv Hmmticnrp(iit P- pansion and by foreign borrowing in amounts and on terms that cannot hP repnatPr in the near future wit.hout imnerilinr ngin qnri Yr1nhce stability. 7. The 7.5 percent increase in agricuiltural production (see Table 6) ws mainly the cnnennenne of the wheat and orn nnrams. For some time the Government has been pursuing a variety of policies desqig_ nePd tor make Npvcinnsfsf'iin in tlpq f7_1"--nq%q-P of guaranteed minimum prices (also applied to sorghum, beans and (CONASUPO), farm credit, irrigation programs, etc. Furthermore, the Rockf~ ell r Fo-~,.d-tJ_, fo. fvS -m-e tm lh_a~ S 10r-e~ en-n;gae A ir-l ivn improved grain seeds and hybrid corn appropriate to the Mexican env iron.men.t. Ti- result of this coincidence --P technlog 'l~- increases in productivity and incentives to expand production has been that the I O , sa In- - k.I L ____ V -C.A? +I, - - __'~t 1t O.-ell S6I .. ~o f I~-A ot 2 I- over 70 and 40 percent respectively, and imports of both commodities ~~~~ 43JV'~V~ U-e11 6 support± prices uljQ U M CL~ O~ O Iu.,lLm to expand production also acted to restrain the growth of consumption so that ilb staTAqTTTO h ound irself nth surpl uses w to reduce4th exported at substantial losses. The Government now intends to reduce the surpluses by modifying its support policies to this end.=' 8. The large increases in both private and public investment in 1964 induced a major expansion in the output of manufactures (13 percent) and construction (16 percent). There was a particularly large (35 per- cent) increase in the production of transport equipment, which repre- sented the accelerated conversio/n of automobile assembly plants to domestic manufacturing plants.../ (See Table 7.) Imports increased about 20 percent; 68 percent of the increase originated in capital goods imports, and most of the rest in intermediate goods. (See Table 8.) 9. Exports of goods and services also rose by an unusual amount. over 7 percent, largely because of the surplus subsidized grain exports which accounted for over L0 Dercent of the 9.4 percent increase in com- modity exports. But in the face of the spurt in imports, the deficit on current account increased substantially. from $206 million in 1963 to $363 million in 1964. The enlarged deficit was financed in part by a large increase in direct nrivate investment, but nrincipally by the growth of official - and to some extent private - borrowing, much of it. for terms ranging from 1 to q vnr. Gron drawings on Pytprnal loans of more than one year maturity were half again as large in 1964 qq in 1 -6, increasing frnm TTS91 million Sn RA71 millinn Net external borrowing increased by a lesser amount, largely under the imnnt-+ n-P n TT.q.79 mnillion lnlh+ nranonmen Y + +Inn PYTMPAATV n-P !n +a 1 r US$72 millio1--n debt prepaymentt_h X~ M K o a t b l ization loan, but was still a substantial US$317 million, considerably more than the UR207 million e c e ea14er (See Table O * in. One;- log- tem coost , A -nce orf t- omb nat~ J,Vlh,% - on o- Arevrr, ropmen +c s. 'JJ.L~ IJ~J. IlL IJ_ W.L.L.. L . 'LI U ..L '. L V .. LI J that Nexico's external public debt structure deteriorated considerably. While ratio of under 17 percent for 1964 and less than 9 percent by 1967, 1/ The support price for wheat was M$913 per ton. The average unit value Vit UUU~ Li~ t.i . D LVOO L4 I I Li LlI L l CAJ.k tX fJjJ W.J.l.LIIO. UV.J . LflL Li 4a to be subtracted for storage and handling costs so that the average .Loss per tun exportu amounts tou T -uu. au uuo,,uo .LVj~ J~i UUU~A4ULUt~ dILUULI ~ L i1yevuU Sic tJ L1 .LVLL,U~ U UUVU UU110 were exported, CONASUPO's losses on account of wheat exports may very roughly be esbtimated aU ViqU milLion, wLtU aoUUter MP4U 0U ;u mllion losses being incurred from corn exports. For 1965 the Government in- teds to pass these Lovses on toh e proucers, maintaining the support price only for grains used for internal consumption. 2/ Under a September 1962 decree, the importation of car parts was banned after September 1, 1964, unless the final product contained ou percent local content. While some of the 8 car manufacturers in Mexico apparently did not meet this target on the deadline date (and may receive extensions), large investments in plants (and anticipatory automobile imports) were one of the results. -4 ueU new 1U0 proJect'on5 UnucaUVe a raLTo 01 aoouT 4o percent.- now- ever, the same projections also indicate that the debt service ratio will decline rapidly after l96 under Tne present repayment scnedule. In 1566 it would be near 18 percent and by 1970 it would have declined to less than 8 percent. 11. Although it is not yet possible to give a definitive picture of public sector investments in 196., they probably exceeded those of the preceding year by approximately one-third. A conservative estimate puts them at some M$16.5 billion (See Table 10), which may be compared with the 14$13.5 billion level originally planned.2/ About one-third of the total increase over 1963 seems to have been accounted for by investments in social services, particularly public health and water and sewerage in the Federal District. Other large increases originated in petrochemicals (PEMEX) and the national railroads. (See Table 11.) 12. A major factor in the high level of public investment was that 1964 was the last year of the outgoing Government, and that consequently great political pressures operated to complete certain public works and to ensure the initiation of others. The Mexican authorities are currently engaged in a careful review of the individual agencies' investment programs. 13. The higher level of public investment in 1964 was not financed out of additional public sector savings. The M$0.7 billion increase in Federal Government savings that was achieved in 1964 (see Annex on Public Finance) was offset by larger foreign debt amortizations. Savines in the rest of the public sector were probably well below 1963 levels because the large exnansion in the investments of some of the decentralized agencies and state enterprises was undoubtedly accompanied by sharp increases in current ArnPneitures. This nri-nmntion i. st.rPnc.henei hv the fact that none of the principal revenue raising measures recommended for the decen- frni,znriniihlit- czr+.ny in PAn1r Pcbn-+. T-T-147-q wo-om ein"+nP-1 in 1QA1_ Tr accelerated investment expenditures of 1964 were instead financed by the heavy increasn in feieian horrowing referred to qhove (some TvL2 billion gross) and by the domestic banking system, whose net additional extension +.n ~~ otheIpVbic- seorv inae from 1I b llioHn %n_Qo in 1QA-A ton 3.9 billion pesos in 1964. (See Table 12.) 14. Estimates made last year by the Bank mission and by Mexican 1/ 21 percent on the basis of the debt recorded by June 30, 1964. indi- term borrowing continued in the second half of 1964. 2/ See Bank Report WH-137a. In 1964 prices this figure would have been -5 - about X$2.0 billion could be absorbed by the public sector without in- flationary consequences, and without depriving the private sector of the: resources needed to finance its own expansion. That actual borrowing of the public sector of double this level without any credit rationing for the private sector did not produce stronger inflationary pressures was apparently mainly the consequence of the increase in private savings associated with the 10 percent increase in GNP. But it was also due to the increase in imports of intermediate products, much of it financed in- directly by heavy foreign borrowing at short maturities. 15. Net financing by the banking system rose by almost N$11 billion (18 percent) in 1964. As noted above, approximately M$h billion of this went to the public sector. According to a different breakdown, about 55 percent of the total increase went to commerce and industry - including state enterprises - over 30 percent went to the Federal Government, and less than 10 percent to the agricultural and livestock sectors. (See Table 13.) This expansion, which was matched by a 15 percent increase in the money supply, was ample to satisfy the demand for credit of the private sector in spite of the increase in the volume of transactions (10 percent rise in real GNP and 5.5 percent rise in wholesale prices). The commercial banking system was so liquid that it could undertake some direct financing of the public sector. contrary to the usage of recent years in which practically all public sector financing by the banking system had been channeled through the Bank of Mexico - 6 - III. PROSPECTS AND CREDITWORTHINESS 16. The preceding review of the highlights of the 1964 develop- ments indicates clearly that several of the main factors that made 1964 an exceptional year are not likely to repeat themselves in the near future. The pattern of agricultural development is likely to h diffP!rRnt! both Rconomin considerations and actual Government policy point in that direction. In manufacturing, the large output inrrseznf' 19(i anr 191 were Au not on lv to substantial new investments during these years but also reflected a measure of flov-ihiiy+.v- in nii+.nni+ mr0 nnq_zihl hv t.he Pristencp. of idl canacitv. It is far from certain that similar margins for expansion still e4ist al+houh undoh+dly acnnnity is s+il hain, naded to. .I 4.n thlJ' pLL.. ~~vLJ1., - _&LIA.'~ t . - -_. -_ crease at the same rate as in 1964. The politically induced e xpans- ;-U1i; n public investUment in 19064 h1appened to coincide with'a vigorous private investment boom. The latter was itself a sign of UIE;i~~ 81OWu1r o- j_e c f do e uL u LvL_6L I AJ.. .UL, .0 Ui UUIi- UA. t1 4- 4 cL. and n- - --A +I future of the Mexican economy, and shows signs of continuing in 1965. Thle pressure s for public sector capital expenditures have largely abated for the time being, and the institutional tools for control- ling suh expenditures have been greatly strenghened 4u nve±a ways. Vesting control over the budgets of the decentralized public sector and state enterprises in the Ministry oi rinmee has vcuulj extended the latter's ability to influence expenditure policies and programs in the public sector. In addition, the new role of une Ministry of Finance as cashier of the decentralized public sector will give it a much more direct role in the implementation of the financial programs implied in the budgets and in linking expenditures to the availability of funds. The new Government nas also indicated that it intends to utilize fully the powers of the official develop- ment bank (Nacional Financiera) and of the Ministry of Finance to restrain all public sector foreign borrowing - including the extension of guarantees for private sector borrowing - so as to control more effectively the terms as well as the amounts of such borrowing. 18. The Government's estimate that in 1965 financial resources available for public investment without risks of rapid price advances, may be between 1013.0 and M$14.0 billion appears reasonable. This projection is consistent with the prospect that no major new revenue measures affecting 1965 will be taken, but that the current expendi- ture policies of the decentralized public sector will be streamlined significantly, a policy which seems already to be under way. It is also consistent with the intention that net new borrowing from the banking system will be no more than about one half of what it was in 1964 and that gross foreign borrowing will be about US$575 million or of a magnitude needed to permit a modest (US$30 million) accumula- tion of foreign exchange reserves. 7 this order can be adequate to satisfy the economy's needs for essential econoic and social infrastructure, provided that a careful review of priorities accompanies the selection of projects, also appears reason- able. Although in real terms the projected level is somewhat lower than that originally planned for 1965, the large investments already made in 1964 - particularly in the social sectors and in petrochemicals - should go a long way toward reducing the urgency for additional expansion in these fields. 20. Although in the absence of an investment program it is not pos- sible now to be precise about the capital resources of the public sector required in future years, a gradual expansion of public investment during the next few years would undoubtedly be needed in a country whose yearly population growth is now estimated at 3.6 percent. Public investment and public policies in Mexico are, to a large extent, geared to assist and support autonomous initiatives and efforts of the private sector, which currently is buoyant. It appears most unlikely that non-inflationary financing for such increases in public investments can be obtained with- out additional revenue measures. As it is, Federal Government savings in 1966 may be somewhat lower than in 1965, because of the transition in the latter year toward a new income tax system. (See Annex on Public Finance). 21. Assuming that domestic bank credit to the public sector in 1966 does not expand by more than now planned in 1965 (M$2.0 billion) and that gross foreign borrowing again is sufficient to cover the balance of pay- ments needs, additional revenues of between M$1L0 and M$2.0 billion will begin to be needed in 1966. (See Table 10.) Although these estimates are impreniRp, thpv rio noint tn thp nn-i for npw rtvenue measures soon, along the lines that had been considered by the Government in 1963 and 1Q6) ndA were ref-lectd in thei altePrnnAiesprsete in W-3h also Annex on Public Finance). 22. These prospects are based on specific expectations regarding the balancof pa- nmnts- (Rpp Tbl Q-) Amnn- h mnq+. imnnrtnnt ATP thpt commodity exports will grow at 4.5 percent per year while commodity im- ,po+t rwill n+ a 0+ n11 iM 10A nd h" 'klIoc +hnn" f . na"cinf in 1QAO Both assumptions represent sharp divergences from actual events in 1964, whe e-osev+ and J- ,sr,+ "^ lysr 0 n"~A 90 "^n - nonf rl-r Pogn Yrl J nry exports, a premise of the projection is that grain exports may maintain their prsent lel -+ , 411 but will 4no +c toagro suhs+ntially. nvern- ment policy - to reduce the support price for exported grains but main- U.L L . U JAL LA.JI~ UJ.t %, 1%1jU.U _L L.JLVLJ. UV. AJJS .J.U U'. ALS.I.. A. -L5 The specific assumptions for the import projection are explained in the S!t ,S- ca"0 A.L ppellud. .. I' L;7u-, U11. CJ _Z:i J. C±LZI. L 1110 LILVIR,i UCII J CIL1U U1 LU policy objectives of the Mexican authorities who can, to a large degree, iuluen:11CE ulu acual VoLUMU 01 Imfports 1i unt WnOrt, r,un. 29. Thomuginh th net. foreaigan bonrrowi.ing oy $200knr miioin rojected+ a for 1965 is of the same broad order of magnitude that had earlier k~cn ~vr,c'wq +1 cY",c th ross , bor r-M-n- "n , 'nA 1 . -.,c + i~& (US$150 million) larger. The impact of the heavy medium-term borrow- .L.L1r 4 .A/4.L4 44O.X.Un L . U b-L -1 I. Z-, 'L1LUA1 UO~ L.L 4_7U.) CL.1LUO U UVJA'C C20 .LC"rC as had been projected. Debt repayments in 1966 will still be high, UuU buLvUZvan1U.U1..LLy IteaSm Su Ml 111 1nn .inLyu, Provc.LUeU wid [1U nL1ULr1U. recourse is had to medium-term borrowing. The indicated problem of Uebt management is a pressilg one, anu i cuearty so recUg1iizeU by the Mexican authorities who have indicated that they intend to lengthen the average maturity of their present debt and to limit net additions to the foreign debt, as far as is feasible, to longer term maturities. 24. To summarize, the Mexican economy is at present in a crucial phase. It prospered greatly in 1964, but it evidently cannot maintain the rate of expansion of that year. Neither the balance of payments nor internal prices could withstand the strains of a continuation of fairly short-term borrowing abroad and domestic credit expansion at the rate of 1964. In addition, Mexico's record of exchange stability since 1954 would be threatened. The Mexican authorities appear to be fully aware of this and intend to curtail public sector investment while the present private investment boom lasts. It appears possible to do this in 1965, since many of the capital expenditures that normally would have been phased over several years were made in 1964. The continuing progress of Mexico in carefully matching public invest- ment and available resources will further strengthen her creditworthi- ness. For the longer term - perhaps as early as 1966 - the conclusion of Bank Report WH-137a calling for additional efforts to increase public sector savings remains valid. In the meantime, Mexico remains creditworthy for carefully selected priority project loans on conventional terms as long as new foreign borrowing and domestic credit expansion are restrained. LIST OF TABLES IN ANNEX ON PUBLIC FINANCE Total PubilC Sector Table I Summary Table on Public Sector Savings, Actuals iV6u-bU and Projections 1965-66 Federal Government Table II Revenues and Expenditures 1960-64 III Federal Government Current Revenues and Expenditures 1960-64 Actuals and 1965-66 Projections IV Yield from Income Taxes (including payroll tax for education) 1960-64, Actuals and 1965-66 Projections V Identification of Major Transfers on Current Account, Made by the Federal Government 1960-64 Other Subsectors VI Federal District Sources and Uses of Funds 1960-63 VII States and Municipalities Consolidated Statement of Sources and Uses of Funds 1960-63 VIII Mexican Institute of Social Security (INSS) - Sources and Uses of Funds 1960-63 IX Government Employees social Security Institute (ISSTE) Sources and Uses of Funds 1960-64 X PEMEX - Sources and Uses of Funds 1960-64 XI Federal Electricity Commission (C.F.E.) Sources and Uses of Funds 1960-64 XII All Mexican Railm-ys XIII Summary Table of Changes Effected by Recent Income Tax Reform XIV New Taxes on Products from Capital XV Evaluation of Income Effect of Income Tax Proper XVI Computation of Yield Effect of New Income Tax Law on Co-:mmercial a-ndl TIdrjia -jl E e TABLE I SUNARY TABLE OM PUBLIC SECTOR SAVINGS ACTUALS 1960-1964 AND PRn.ETP(.Ti,,716-266;./2 (i illionsQn f p -e ) 1960 1961 1962 1963 1964 1965 1966 Federal Guovernm,en- 15/1 3,0 2n ,5.3. 2,01.P 3 ,> 1.,7-18 A 5,4 1 ,87 7 ~~~~v C-.LIie1. 7/J,UJ .24 c- .»4V L4 f _.LuJ J 4 Ä" ~ . Federal District ~ 754 842 786 840 800G 900G 1,00OG StatCLes and ui- palities 344 315 354 428 45xC 475G 500G 0-.1- . .a . 1 1. OrnO n~ en« -1 n,on l. 7',r7 r' r,n10 I rln«1 !f -37,7 uuuT 151 201 285 257 22.9 250 2750 ISS 455 592 650 692 600G 660G 725G Sub-total 606 793 935 949 82Yl 910 ¡L,000 Pemex 2, 2 2,320 2300 2,> 2,> 2,50 ,550 CFE 119 184 198 212 399 399 3/ 563 3/ Railways - 178 - 38>4 - 472 - 595 - 700G - 8000 900G Other Decentralized Agencies h/ 786 544 999 1,100 1,100 1,2000 1,3000 Sub-total 2,754 2,480 3,025 3,217 3,110 4,049 2,763 TOTAL 8,252 6,964 7,948 8,941 9,902 10,680 10,140 1/ For more details on each line, see the supporting tables; see also notes on i 1,1 ý&£I..l b-LI. ý * 2/ The figures, marked with G, are no more than orders of magnitude, subject, to WiVe IrI nsLLLJ.L of L euror Lt is0 uleleuy assouileu, on the basis uf severaL convergent indications, that savings in sectors, other than the Federal Governmuenit iere low in 3164 but that the norl upwd rend oj bavigb in most agencies will resume in 1965 and 1966. Ases«imåaved y T IOD i ion. / In line with projection made in WH137a, where figure was arrived at in &Iundirec way; adjusd for ]LikelQy decrease iJ. ösav.LIgs LI JL1u4 5/ The underlying definition of current expenditures excludes intrasectoral transfers. Decentralized agencies are also excluded. TABLE II wTanvas T. flanwiT1nwana REVENUS A.D EXPEDTTURES 1960-6h (in millinns nf n#z.cn.q 1960 1961 1962 1963 1964 On Current Account 1/ Current Revenues 11,84 11,81 13,567 15,294 17,400 Current Expenditures 2/ 8,692 10,167 11,597 12,784 13,od Surplus 3/ 3,152 1,67 1,970 2,510 3,h92 On Capital Account Capital Revenues 18 25 36 42 50 Ii ror-+. Tnve+.men+. 9 74 71 9 ARic 74 Indirect Investment 1,234 859 839 1,391 1,270 Deficit -3,981 -3,488 -3,554 4,171 L,958 Overall Budget Deficit - 829 -1,941 -L,58 -2,201 -l,466 financed by: Net Borrowing h84 1,398 1,694 1,998 n.a. Gross Receipts (3,953) (5,521) (5,073) (4,643) Amortization (3,409) (4,123) (3,379) (2,645) Cash Balances and Surplus on Extrabudgetary Accounts 345 543 - 110 203 n.a. Current Account Surplus as % of Capital Expenditures 78.8 46.9 5h9 59.7 69.7 Overall Budget Deficit as % of Total Expenditures 6.5 14.2 10.4 13.0 7.8 Source: Ministry of Finance 1/ Including taxes compensated with subsidies. / Including intrasectoral transfers on current account. For details on the latter, see table V. 3/ Without adjustment being made on account of intrasectoral transfers. TABLE lI FEDERAL 0OVERNMENT CURRENT REVENUES AND EXPENDITURES 1960-1964 ACTUA-LdS Amn 1965-1966 PROJECTIONS (in millions of pesos) A ctuals _Projections 1960 1961 1o62 1963 196b 1965 1966 Current Revenues 11,8 ,81b 1,567 11l17,00 2 24 Taxes on Incomes 1/ 3,628 li,071 11,724 5,967 7,404 8,625 9,032 see Table IV. Sales Tax 1,102 1,269 1,h49 1,532 1,746 1,946 2,236 + 11.5% p.a.; Import Tax 1,753 1,678 3,688 1,85c 2,364 2,364 2,45n direct estimate; Export Tax 932 914 863 872 682 650 610 direct estimate; Excise Taxes 1,314 1,466 1,802 1,902 2,129 2,364 2,624 + 11%; consists of several levies; Other Taxes and other Current Receipts 2,219 1,792 2,268 2,405 2,305 2,500 2,700 direct estimate; variety of taxes, mostly with erratic pattern; Taxes, compensated with subsidies 896 626 773 766 770 770 770 assumed constant; Current Expenditures 8,692 1:,167 11597 1 78 13,908 1_5202 l900 Administrative Expenditures 4 753 5,150 5,6h7 6 397 6,841 7,537 8 286 "Wages and Salaries" ~ 5,391 TS~ -5¯;T975--7-57 ~76 -7 '-0, + 10.5% p.a.; fairly regular trend; "Purchases of Materials" 392 399 413 431 508 551 598 + 8.5% p.a.; fairly regular trend; "General Services and Others" 416 361 434 574 581 630 684 + 8.5% p.a.; erratic trend; Debt Interest Payments 507 703 708 686 798 886 l,007 net increase in external debt estimated at Ps 400 million p.a. and internal debt at Ps 1,200 million p.a.; interest rate on inte-nal aid external debt put at 5% ard 7%; Transfers on Current Account 2 ,40 3 587 4 339 _4765 5 317 5,891 6 577 "For consusmption" ,126 2,63 3,36 3,71 ~ + 12.5% p.a.; "For investment" 79 189 181 213 309 340 374 + 10% p.a.; erratic pattern; "Social Security Contributions and Social Welfare" 684 862 1,207 1,319 1,397 1,493 1,645 + 6.1% in 1965 and 10.2% in 1966; "Others" 37 72 89 197 200 220 240 direct estimate; Unclassified 96 104 130 170 182 218 260 + 20% p.a.; Subsidies, compensated with Taxes ~796 ¯2 ¯ 773 ~¯766 770 ¯770 770 assumed constant; Surplus on Current Account (including intrasectoral transfers in outlays) 3,152 1,67 _,970 ,510 3,492 3,917 3,524 Surplus on Current Account (excluding intrasectoral transfers in outlays) 2/ 3,800 2,53h 2,848 _3_507 L,718 5,146 _4,877 Source: Actuals fromi.inistry of Finance; Some of the assumptions, underlyLng t'e rrnietion, arc diEued in Appenýix A. 17 Including, since 1963, payroll taxes for education. 2/ For details, see Table V - for 1961-1965, same ratio between intrasectoral and total current transfers as in preceding years has been applied. TABLE IV YIELD FROM INCOME TAXES (INCLUDING PAYROLL TAXES FOR EDUCATION) 1960-1964 ACTUALS AND 1965-66 PROJECTIONS (in millions of pesos) Actuals Projecti:ns 1960 1961 1962 1963 1964 1965 1966 Assumptions I/ Taxes on BasinssBB Profits 2,768 3,8 2,883- 3,0,366 523 5,7 3,06 1 3,450 _,36 K237 5,237 of whicht Schedule I (commerce) ( 708) 863) ( 978) (1,030) (1,346) - - II (industry) (1,367) (1,4o) (1,473) (1,775) (2,308) - - III (agriculture) ( 24) 28) ( 39) ( 37) ( 40) - - Excess Profits Tax ( 96) 103) ( 143) ( 30) - final payments still due on 1964 incomes; Distributable Profits Tax (573) 2/1 647) 2/ (304) (463) (529) (530F) - New Tax on Total Profits - - - - (4,677 ) (5,237) arrived at by projecting the yield from former schedules; "normal" increase in ScIhedule I and II put at 14% in 1965, 12% in 1964. To this should be added the effect of 11.3% average rate increase in new law; 1% Payroll Tax on Employers 499 4/ 374 419 469 + % a Employees - - -. - 306 - - Tax on Salaries 757 866 1,225 1,416 1,690 2,258 2 ,552 + 1.3% p.s.; Income from Professionals 3/ 87 105 144 160 180 123 137 + 13% p.s. but new rates are assumed, on average, to be 40% lower than previously. Rentals 3/ - - 170 165 198 235 258 + 10% p.a..; moreover broadening of tax base is assuned to increase yields by 15%; Dividends - - - - - 240 271 will amount to 40% of yield from distri- butable profits tax; for the latter + 13% p.a. is assuped; Income from Capital 3/ 28 16 287 240 286 326 372 + 14p.as.; Tax on Accusulated Incomes - - 15 37 65 20F - Global Tax on Upper-Incame Individuals (including the option afforded to taxpayers in Ps 72,000 - 150s000 bracket). Effect of new legislation - - - - - - 163 - 184 negative impact of new legislation on yield, as assessed in Appendix with adjustment for 1965 and 1966 base; Sub-total - - - 5,958 7,465 8,695 9,112 Residual 51 - - - + 9 - 61 - 70 - 80 Total 3,628 4,071 4,724 5,967 7,404 8,625 9,32 S r- 71mti S ed ffct of reform proper see the Appendix. - 7/ Also includes income from capital, in 1960 and 1961. 1/ On account of fact that yield for each item in 1964 was estirrated on basis of 11 months sta iistics; sum of subtotal shows slight discrepancy with official estimated. total, for 1964.anywtofia 4/ Eleven months only. 5/ Since 1963, a new category, 'taxes collected by means of stamps" has been added to tax statistics. It has been allocated for 1/3 to professional incomes, 1/3 to rentals, 1/3 to other income from capital. F Stands for "final payments", due in 1965 on 1964 incomes. TABLE V IDENTIFICATION OF MAJOR TRANSFERS, MADE BY THE FEDERAL GOVERNMENT ON UURAtit± 1GUUL11 170UJCQ 'in millions of pesos) 1960 1961 1962 1963 1964 Account 2,240 3,587 4,339 34,766 5317 To Agencies within Public Sector sectoral) 501 750 708 828 957 3/ Pacific Railways 93 180 137 176 f.L~~ f / n' I, n % f 1 *' (to cover operating def icit) L k LoY) k -1) k I.-L7) (for investments) - ( 11) - ( 57) 1ioUhnal RallwuyS 4 140 )4( (to cover operating deficit) ( 224) ( 312) ( 299) ( 435) k1or Investments) L m; i 1kOf k M((1 k 11) Housing Institute 40 55 25 37 To Agencies outside Public Sector as defined bv Mission (extra- sectoral) 2,031 2 1914 29728 219773 __6 C ONASUPO - 2(, 100 Ejidal Bank 50 105 399 417 Agrienltural Bank 30 n 29 30 Others 1,051 1,794 1,900 1,926 Statutory Contributions by Government to Social Security Institutions 17 488 643 903 1 165 1300E INSS 372 32 549 ISSTE 116 211 354 500 Account 661 624 773 766 770E . WIL.L.11 e-1 Intrasectoral Transfers ( 147) ( 137) ( 170) ( 169) ( 169) Extrasectoral Transfers 0 >1 1o8) O 6u) L >97) L 601) Total Transfers on Current Account 04 1 1 >,112 0 08 of which: Intrasectoral 648 887 878 997 1,226 Extrasectoral 2,256 3,324 4,234 4,535 209 Source: Public Accounts 1960-1963. - 1/ On account of the statutory character of the Government's contributions, the latter are treated as savings of the social security systems, not of the Federal Government. 2/ Detailed breakdown was available for 1961; the 1961 ratio between intra- and-extrasectoral transfers has been applied to other years. 3/ For 1964, 18, of total effective transfers were assumed to be of an intra- sectoral nature. This ratio is in line with the one in previous years. TABLE VI FEDERAL DISTRICT SOURCES AND USES OF FUNDS 1960-1963 1960 1961 1962 1963 1964 1),+ Pr v4, -1 fol -1 701, 1 R). 0 Real Estate Tax ( 338) ( 391) ( 421) ( 478) Revenues ( 646) ( 731) ( 847) ( 966) Current Expenditures 592 682 918 1,001 Wages and Salaries ( 357) ( 386) ( 439) ( 562) n/ 1 / -/1 / I l / l U ule ( )} Yo) k 4U1 k 4.) Surplus on Current Account te o14 7oo o4u Other Resources 1/ - 197 -220 290 90o Total investiole esources --7 622 1,U7 938 Uses of investible Resources Fixed Investment 496 535 965 801 Purchase of Real Estate 61 87 132 137 1/ This item is mainly determined by the result of extra budgetary transactions6 TABLE VII STATES AND MUIICIPALITIES CUNSULID,TED STATE1-'E*-.T OF SUUUES AND USES O FUNDUS 1900-19139 Current Revenues 2,433 2,518 2,876 3,215 n,,a. Current Expenditures 2,089 2,203 2,522 2,787 Surplus on Current Account 34 315 354 428 Other Resources Net Borrowing 80 254 225 80 Cash Balances and Niscellaneous 63 - 57 9 - Use of Resources Direct Investment 390 412 493 371 Other Expenditures on Capital Account 97 90 95 137 Source: Ministry of Finance 1/ For 1963, only data for states were available; total was arrived at by adding tatesq for riininn1iti on basis 1962 ratio btween rnininalifienq states, TABLE VIII MEXICAN INSTITUTE OF SOCIAL SECURITY (IMSS) SOURCES AND USES OF FUNDS 1960-1963 1960 1961 1962 1963 1964 Savings 455 592 650 692 n,,a. Receipts from Contributions by Employers, Employees and Government 1/ 1,714 2,091 2,500 2,978 - Employers - Employees - Government Receipts from Financial Investment 58 83 100 148 Total Current Expenditures 1,317 1,581 1,950 2,434 Uses of Savings Fixed Investment 301 381 458 n.a. Net Financial Investments - 38 128 100 n.a. Other Uses, of which: 192 83 82 n.a. Purchase of Real Estate ( 30) ( 54) ( 69) Others (such as increase in medicinal sunnlies) I A62) 29) 24) 1/ Contributions by employers are graduated according to daily salary, but with only small difference in average contributions (between 3.3 and 2.970 of salaries); employees pay half the rate, charged to employers; governmental units contribute half the amount paid by employers. TABLE LA GUUVERN1atENT EHnLLUEES SUCLAL SECUURITY 11NSTITUTE (ISTE) 1960 1961 1962 1963 1964 P Daving3 11 Z Ul ;eO _( _24 Receipts Contributions by Government Sector and Employees 1/ 300 [57 691 798 933 of which, by: Federal Government ( 353) ( 467) Federal .District ( 35) ( 31) Decentralized Agpncies ( h46 ( Li Employees ( 364) ( 391) Other Current Receipts (Investment Tncome, Reth 16 20 25 142 50 Current Expenditures 165 276 431 583 759 Uses of Savings 151 201 285 257 224 Fixed Investment 19 50 75 85 68 Financial Investment 133 117 142 179 146 Loans to Members, net of Repayments ( 129) ( 127) ( 156) ( 219) ( 161) Financial Investment ( 4) (- 10) (- 14) (- 40) (- 15) Other Uses (Residual) 9 34 68 - 7 10 Source: ISSTE P Preliminary 1/ ~ ~ ~ ~ ~ a potiutuL VJ. presntl asafllows for Medical Work by Pensions Services Accidents Total Government 6 6 0.75 12.75 Employees 6 2 - 8 TABLE X PEMEX 1/ SOURCES AND USES OF FURDS 1960-66 1960 196-L 1L962 19 63 16 Gross Cash Receipts 5,803 6,382 6,641 7,167 73CO Operating Expenses 2,989 3,109 3,366 3,700 3,900 Cash Surplus on Operations, including depreciation 2,811 3,273 3,256 3, 467 3)400 Payments t- Government 787 953 956 967 1,089 Cash Surplus on Operations after Taxes L027 2,320 2,300 2,500 2,311 Debt Payments 839 1,171 657 Total available from own resources for investment 1,888 1,525 1,129 1,650 1,550 Borrowing 1,036 1,059 1,167 524? 822? Total Resources fcr Investment 2,92,4 4,584 2,296 2,174? 2,372? Total Investment (as in programs) 2,439 2,130 ,634 1,756? 2,118? Other Capital uses, increase in working capital, discrepancies h 85 L34 662 2.41 8? 254? :L/ ]Perex accounting presents difficult problems arn[ alternative presentations are conceivable de'pending on how items such as drilling' eXL)enditures are treated. 'It was not possible to obtain data for 1963 and 1961 within the framework adopted 19 the 1963 mission. Figures for 1963 and 1964 therefore are tentative, especially with respect to the last four lines iLri the table, which are influenced by the estimate for borrowing, as made bW the mission, wbich is substantially at variance with data submitted I.- Pemex.1 !our.e: 1963 ris7ion7 and 9P6,ex. Table XI. FSDERAL ELECTRICITY CUiISSION (C.F.E.) - SOURCES AND USES OF FUNDS, 1960-64 L/ 1960 1961 1962 1963 :964 Gross Operating IRevenue 471 505 739 985 1,206 Cost of Operation, excluding depreciation 352 401 541 773 987 Internal Cash Generation (Savings) 119 184 198 212 .219 Plus Government Contribution, of which 433 437 696 641 560 Electricity Tax (148) (170) (208) (221) (250) Contribution by,States (28) (28) (35) (38) (56) Ca:pital Contribution by Federal Government (257) (239) (453) (382) (254) Borrowings 178 694 1,560 L,460 1,817 Equals: Funds available for Capital Expenditures 730 1,315 2,454 2,313 2,596 Investments 979 1,290 2,050 1,827 1,528 Increase in Working Capital ) 25 170 576 Debt Amortization ) -249 25 379 316 492 1] Information based on IBRD technical reports and statemnts of C. F. E. The 1964 figures are partly estimated, / Includes interest on debt as follows: 1960 Ps,49 million; 1961 Ps.60 million; 1962 Ps.120 million; 1963 Ps.184 million 1964 Ps.260 million. / Preliminary TABLE XII ALL MEXICAN RAILAYS, USES AND SOURCES OF FUNDS (1960-1963) (in millions of pesos) 1960 1961 1962 1963 1964 Gross Operating Revenues 1,866 1,795 1,803 1,937 n,a. Cash Cutflow on Operations 2.044 2.179 2.275 2,532 Internal Cash Generation - 178 - 38L - L72 - 595 Plus Government Contributions To operating deficit 319 351 560 7h2 FCor debt payments 320U 398 3 3 For investment 107 - 160 230 Plus 1U Tax on Users 128 154 154 201 Plus External Borrowing 424 660 500 358 Equals Funds available for Capital Expenditures 1,120 1,179 1,335 966 Minus Debt service 36 W42 [77 161 Equals Funds available for fixed investment 756 737 - 858 8o5 Fixed Investment 808 786 852 800E Discrepancy 52 49 - 6 - 5E Source: Iinistry of Communications TARLE XIII SMMARY TABLE OF CHANGES, EFF-CT.D 1BY RECENT INCOME TAX RFFORM N_fewSys_tem as Comp7ared to ODld = 7se --___________________ Tax ApplyLng in Old SystemReak Ta Aplin i Od ysemTax Applying Tax Base Rate's Remarks Enterprises whatever their legal form Schedule I (commercial profits) Tax on total Basically Increased S(Industrial prufis) urofits of as III (agricultural profits) enterprises; previously; (simpler assessment methods "minor" taxpayers now defined as those with applied to "'minor" taxpayers)P appled o "inor tapayrs)gross receipts under Ps 150,,000 p.a, instead of Ps 300,000; Corporations and Partnerships Distributable Profits Tax -Tax on 196 profits, still to he collected (Schedule VII) in 1965. Tax on dividends, actually distributed, now to be pail by shareholders; Excess Profits Tax All Enterprises 1% Payroll Tax on Employers--------------------------------no chang Individuals I. With Taxable Income below PS 150,000 (a) income from labor Schedule IV (wages) 8o% of gross New rates are Tax on labor income (for err- set in such a Schedule V (professionals) income pioyees), 80% way, that, 1% payroll tax on employees of net income taking into (for profes- account the Professionals now taxed at same rate as sionals); 20% deduction emplaees; and the (now discontinued) payroll tax on employees, ef- factive rates are as previ- ously; (b) income from capital Schodule '1 (interest) Ta:c on products, Oat:, slight Basically as For more details, see Table XIV; VIII (rentals) from capital (see changes; exerp- previously IX (miscellaneous) Jseparate Table) tion level for slight in- rentals reduced; crease on II. With Taxable Income As for taxpayers under I Tax on global itrss above Ps 150,000 (and income Ir principle, Maximum mar- Scope of global tax has beer. greatly with taxable income to.tal net incomes ginal rate reduced in 1965 Revenue Law; between Ps 72,000 and (only 5C% of now 35%, Ps 150,000 if they opt rentals included); instead of for global tax) personalized, i.e. 5n%; III. Those with Taxable Tax on accumulated _ Income, exceeding incomes Ps 180,000 and derived from sqore tharo one source TABLE XIV NEW TAX ON PRODUCTS FROM CAPITAL Tnx Rase Remarks I. Interests 'deriving from any Same rate schedule as for Interest received; 10% prepayment at. source; sort of contracts" wages; II. Interests from bonds and other, 2% to 10% depending on in- Interest received; Retained at source; negotiable debt instruments terest rate, provided interest exceeds 7%; III. Capital gains realized on real Same rate schedule as for Basis of tax on real estate consists of Tax assessed per unit of real estate; estate and securities wages; part of the gains, varying from 80% to 20% (for individuals), 100% to 20% (for Capital gains from securities are exempt, enterprises) and graduated according to according to Revenue Law 1965; time interval between acquisition and sale. Gains on assets, held for more than 10 years are exempt; IV. Rents from urban real estate Rates are 0.14% for re- 70% of rents, actually received; Tax collected by means of stamps; gulated rents, 0.7556 for rents up to Ps 700 per month and per unit, 5% for rents exceeding Ps 700; V. Dividends and any distribution 15% on dividends up to Dividends actually received; Rates apply per person and per amount of of profits of enterprises Ps 180,000 p.a., 17.6% dividends received from same company; to individuals on dividends from Ps 180,000 to 270,000 No longer any distinction between bearer p.a., 20% on dividends and nominative shares; exceeding Ps 270,000 p.a.; Exemptions - author's royalties. - interest from deposits in banks; - interest from public debt; - "intercorporate dividends'; income from'mtual funds"; - profit participation by employees (new 'profit sharing" 'Law); - stock dividends; - conditional exemption of capital gains if b. (for individuals) the capital gains derived from the self-occupied house, if reinvested in another dwelling. TABLE XV EVALUATION OF YIELD EFFECT OF ITCOM4E TAX REFORM PROPER (in millions of pesos) Estimated Actuals Yield Under New System, if in 1964 Applied to 1964 Basis (Old System) (differences with (A)) (A) (B) I On Enterprises Schedule I (commercial) 1AL6 II (industry) 2,310 new tax on total profits - samnle 1/ + 171 adjustment 1/ +- $1 Schedule III (agriculture) 40 distributable profits tax 530 - 530 excess profits tax 143 -1143 loss carry-over 2/ a.. 2/ II Schedular Taxes Applied to Indi- viduals, i.e. to those with taxable income under Ps 150,000 - on wages and salaries 1,690 on income from self-employed people 83 - 33 1 payroll tax on employees 373 - on dividends distributed + 212 - on other canital incomes rentals 100 + 25 interests 1R0 + 10 TTT Global Tax on Tndividuals Tax on accumulated profits 65 - 65 Effect of tlobalisation" + 25 Effect of lower rates in the "upper-income brackets" - 32 Effect of option in Ps 72,000 - 150,000 bracket - 80 Sub-totals + 699 - 979 Total Net - 248 1/ As discussed in Appendix A. L LI~JA U L-LJ.L Vt; 0J..61Ly L1t;8CL.LVt:;fVt, VJ L "j AJ/ .U1Wil -L7i,)) UL19 TABLE XVI COMPUTATION OF YIELD EFFECT OF NEW INCOME TAX LAW ON COMMERCIAL AND INDUSTRIAL ENTERPRISES 1/ Effective Tax Difference Taxable Profit Number Paid iv Ta Peyable Each Bracket Effetive Tax i.f New System were Inraes%Tx Gross Annual in Each Bracket of P of Taxasle ifpNew Ss w ne asx- % ofTaxble Applied as fo of Tax- Profits (average) (pesos) Taxpayers Profits e of Tax Paid Collections (Q) (II) (average) (pesos) (averge) (pesos) Under Old System (millio pesos)2 Unde Olderge System) (mliUeo) (IV) Q - x 100) (vi) III in piec0 0 - 100,000 2,215 772,282 0.49% 0.9% - 100,000 - 200,000 15,735 7,2[2 6.73 6.73 200,000 - 300,000 25,108 4,226 8.15 8.15 300,000 - hoo,ooo 35,104 2,910 9.31 9.75 4.68 0.5 400,000 - 500,000 44,740 2,108 10.26 11,40 11811 1.0 500,000 - 600Yo0o 51,655 1,623 10.79 12.31 14.07 1.3 600,000 - 700,000 57,927 1,289 11.26 13.o 15.78 1.3 700,000 - 800,000 66,914 1,057 11.86 13.91 17.33 1.4 800,000 - 900,000 71,006 886 12.11 14.26 17.80 1.4 900,000 - 1,000,000 77,855 757 12.52 14.84 18.53 1.3 in million pesos 1,0 - 2.0 109,695 4,215 14,24 17.13 20.28 13.3 2.0 - 3.0 167,052 1,701 16.44 19.80 20.43 9.5 3.0 - 4.0 223,765 849 18.16 21.87 20.41 7.0 4.0 - 5.0 296,774 609 19.81 2378 20c03 7.2 5.0 - l00 57,694 1,604 24.11 28093 20,00 Q.4 10.0 - 20.0 1,286,364 865 2848 34.64 21.61 68.5 20,0 - 30,0 2,500,000 292 32.75 38.21 16.67 39,9 30.0 - 5o.o 4,ooo,ooo 2[9 3510 39.63 12.93 45.1 50.0 - 100.0 6,000,000 165 36,40 40,42 11.06 39.9 100.0 - 900.0 23,000,000 119 38.32 41.59 8.53 89.5 Total 805, 8 372-5 Source: Abridged from document prepared by Ministry of Finance. 17 Abstracts from the repeal of the Distributable Profits and Excess Profits Taxes. The yild under both Qhe old and the new system is arrived at by multiplying the number of taxpayers by the average amount of tax paid in each braoket ANNEX ON PUBLIC FINANCE A~4j L -.L 0 U L Vi ~ ±J U I W 1U± sect whole, savings increased substantially in recent years or can be expected LAo ri e in % L7 UU aJIL presen-'--',--- P.'L ' - 1riI Ud".A C U D I IM %ZI;C"d Ut-; it evaluates two important measures which were enacted soon after the new adita tion1J-(1'1-L1 tUU& UVt=rI Vi, th refor o':JU"f1 the Wincm -LAftaxdW arid a ne-u mechanism for controlling financial transactions of the decentralized agencies. The final section of the Annex reviews -We most debsiraOle avenues for increasing public savings and strengthening the revenue system. ±. PUBLU SUTUT SAVINGS IN UENT IEARS The Federal Government (excluding decentralized agencies) 2. Savings - Tables II and III show the surplus on current account of the Federal Government in recent years. Two alternative definitions of current expenditures are used in Table III, viz. total current outlays and, for purposes of consolidating public sector data on savings, total current outlays - minus current transfers - to other segments of the public sector. The tables indicate that, on the whole, the Federal Government has been able to finance a substantial part of its capital expenditures through current revenues. Recourse to borrowing could, therefore, be maintained at moderate levels. There were, however, large fluctuations from year to year; whereas current expenditures experienced a fairly regular growth, current revenues developed in an irregular fashion. In 1964, savings of the Federal Government rose by almost 35i over 1963 levels. 3. Current Revenues. As illustrated by Table III, tax and quasi- tax receipts rose very substantially in most recent years. In 1964, current revenues were 46.9 per cent in excess of 1960 revenues, which corresponds to a 10.1 per cent annual rate of growth. Revenue increases are very similar to the rise (45.7 per cent) in money GNP over the same period. L. The increase in current revenues was oarticularly marked in 1964. Preliminary figures show an increase of 14.6 per cent over 1963, somewhat less than the GNP growth in money terms (16.9 per cent). This overall increase is mainly attributable to two taxes. Revenues from ineome t-x vield rnsA by as much as 30-2 ner nent over 1963 figures. though no changes in tax legislation have been enacted in 1964. Import dutesinreaedby27-7 penr cent.- Thisq is ln-argely atrbtbetfhe 0 4.- C_ -I r_ 1U _ U"-II V.IL Ot _± L14 U11U VCLLUU LU. UUL1MIVU.JLy _L[11J()1-U UU-U lulle 'y_Le'.L increment is also partly linked to some shifts in the composition of imporO (OsU as the lcraSu in toe number of cars imported) ana to a comprehensive reclassification of items in the import tariffs which resulted in an increase in the effective rate import duties. The increase in current revenues during the 1960-64 period is partly attributable to two major discretionary changes in tax legis- lation. A payroll tax, earmarked for education expenditures, was in- stituted in 1963. It was originally due both by employers and employees, but since 1964 the employees' contribution has been incorporated into income taxes. There were also changes in the income tax, with effect in 1962 and described in WH-137a. The yield effect of the latter changes, as related to the 1962 tax base was then evaluated at Ps. 250 million. 6. If allowance is made for these two changes in tax legislation, current revenues appear to have risen less rapidly (only 38.5 per cent) than money GNP. Several elements in the tax system and especially a host of minor taxes as well as several production taxes (many of which annually carry specific rates) react in a relatively insensitive way to changes in GNP. Sales taxes have been rising faster than money GNP; the yield from. export duties, on the other hand, has been shrinking progressively, even in absolute terms, on account of deliberate and justifiable tax reductions on exports. The yield decline was particularly large in 1964, as a result of the repeal of duties on various agricultural products and despite the nine per cent rise in commodity exports value. 7. The fastest increase in current revenues occurred in the income tax field. As already indicated, part of the increment is due to the taxes introduced in 1962/63, mainly those with resnect to several types of pro- perty income. Yields from taxes on business profits have been closely related to overall economic develonments- i.e. to the sluggishness in the 1960-62 period and the subsequent boom conditions and replenishment of profit levels in 1963/61L. The ereatest relative increase. however. occurred with respect to taxes on employees. 8. There is little doubt that the increase in income tax receipts is to A large extent attrihutahle to better AnfornAment and imnroved compliance standards. These administrative improvements mainly derive from the institution of a feciernl register of taxnavers. Starting with 1963, each individual subject to income taxation and each enterprise (tecaterbing tnn.qHirP.i . n-. taxpaynning unit.) had to register and was assigned a specific number - as was done recently in the U.S.A. Recentl, t-he number of registered taxpnaersQ -rose fuvrtherOy fronm 4,200,000 at the end of December 1963 to 5,399,622 in early January 1965. thos econoceelenusiber of tapayers covered cannotlzati to economic developments or the rapid pace of industrialization. 9. Tne register nas permittea tne iden nb±±ca ion of une gna t majority of the taxpayers who are statutorily liable to income tax. Once a taxpayer is registered, complete evasion through non-declaration of incomes is no longer possible. Owing to the register, taxes on wages have now been brought under firm control, especially in the frequent cases where an employee was working for more than one employer. But despite these developments and a noticeable improvement in the relations between the authorities and taxpayers, evasion admittedly is still widespread, especially with respect to profits of smaller business units, the incomes of professionals and property incomes. Sales taxes are also known to be greatly under-assessed. 10. Outlays. Table II shows how expenditures of the Federal Govern- ment, both on current and capital investment, developed in recent years. There has been the sizable increase in direct investment outlays in 1964. The other major expenditure items have moved in a more or less regular way. Some, however, such as financial investment, have naturally shown a somewhat irregular pattern. More details on current outlays, broken down according to economic classifications scheme, are recorded in Table III. 11. A sizable part of Federal Government revenues is, in fact, trans- ferred to other agencies. both within and outside the public sector. either in the form of outright subsidies (transfers on current account) or with the GovArnmRnt aniring nlaims or ownershin rights (transfers on capital account or financial investment). Current transfers have been growing rera . in Yo-an. vPyar. Table V nntains information on the amounts thus transferred in recent years. It can be seen that operational deficitS, co12V9red by the, rov'TMV%Mn ocu r mi nly wt ith then P.niiP_z CONASUPO, and the two agricultural banks. 12. Other subsectors. As of February 1965, data for 1964 were not Government, i.e., the Federal District, States and Municipalities, the the latter, the Railways, Pemex and the Electricity Sector are the most agencies. 13. The data available are recorded in Tables VI to XII and an attempt is made in Table I to consolidate the savings of the public sec- tor as a whole. Whereas the data for 1963 can be considered to be reliable, those zor 1o1 are highly tentative. bs, nowever, KUoWn mUaU, in the decentralized agencies as a whole and particularly in Pemex and ISS, investment outlays were much higher in 1905o than previously. Data on other sources of financing (internal and external credit) support this, and furthermore suggest that alongside with the rise in investments, current outlays in 1964 also experienced some increase, thus reducing the amount of internally generated cash available for investment. - )I. - Th. The Iast Bank rpnni-t. nn MPien (WH-1-7P) reommenrd measures to improve the savings performance of the agencies in the railroad, elec- tripity. nr nP+.r n=1im c:et.n- +.hrni,rhb rn+is ineynmar and/nqnA/ny aliminmAinn .f subsidies. Apart from the discontinuation of subsidized gasoline prices of subsidies have occurred so far. II. TAX REFORI L2. ftnILULtUUU6. Ile Uax reformI, promuLgaU on iecemuer ) L:yI49 only affects the income tax. It did not include earlier plans to in- crease the rate of the sales tax and to institute a Luxury tax on tne sale of specified luxury and semi-luxury commodities and services. It also exempts, for 1965, most incomes from capital under the "gLobal tax" on upper income recipients (see below). 16. Contents. With respect to enterprises, the new legislation substituted the former complicated system of taxes on business profits which, as described in WH-137a, besides taxes on business profits in Schedules I (Commerce), II (Industry) and III (Agriculture) encompassed a tax on distributable profits and an excess profits tax by a single tax on business net profits. This tax contains a progressive rate schedule and applies to all enterprises, irrespective of their legal form. Structurally, the new tax is therefore very similar to the previous Schedules I, II and III. The excess profits and distributable profits taxes disappear. As compared with previous rates in Schedules I and II, present rates remain unchanged for annual taxable profits below Ps.30,000. Thereafter, the difference in previous and present effective rates progressively increases and is 20 percent higher than formerly for taxable profits between Ps.500,000 and 1,000,000. Beyond this point, where the top marginal rate (= 42 percent) comes into effect, the difference narrows and the tax bur- den on a taxable profit of Ps.10 million, for example, is 9.6 percent higher than rreviously. The new system also allows a 5-vear carry-fornard of business losses. The previous distinction between "large businesses" (mavores). which are obliged to keen elaborate accounts. and "small businesses" (minores), which only have to declare their gross sales level, is bein- maintained. The demarcation line between the two categories. however, is now put at Ps.300,000 of gross income instead of Ps.150,00 per annum. 17- Wit.h rp.nt. tri indiv-iduals-cz t.hprp arp twn haAin nbana.q_ First- whereas previously 5 of the 9 "schedules" (i.e., separate taxes on each r+.Panr-t nf' -nnp n~'~n-nlior +e% nivdas hrnnr-f*r'i +.fhan w~ill1 hP n1v two broad categories of taxes on individuals, viz, taxes on income from labory antae ntepout r my% ap+nl - Theanehovr,s more formal than substantial, as can be easily inferred from Table YI Lch-- ,1, in,i f,mn-~a-ihJ, record v.tv' +-e m-a-n,i chl-nges.c T'n-,n-rr~ i, ~nmr discriminatory rates on incomes from capital are maintained, with only as appears from Table XIV. VY %; U t. U A L 1 J. L J. 0 U 1.L a -.LJ.' W JJ~ , 'WW J.L - VJ A I L . JI IL WJ will be exempted. The new rate on wages is established in such a way that e.fective tax burduen on 1laor incumes of equal amount are identical to previous ones, as long as taxable income remains below Ps.150,000. Self- employed people are now taxed at the same rate as wage-earners, wuerea formerly they were subjected to a higher rate up to a taxable income of about Ps.250,000. As formerly, self-employed taxpayers can deduct pro- fessional expenses, whereas wage-earners are taxed at the source on their gross wages. 19. The second major change concerns the introduction of a personal- ized global tax for "upper-income" taxpayers. Individuals with taxable income in excess of Ps.150,000 will be subjected to a tax which, in principle, applies to total taxable income from whatever source derived. Allowances are now granted for dependents. Those with taxable income between Ps.72,000 and Ps.150,000 may choose either to pay the personalized global tax or to be assessed in the same way as persons with taxable in- come below Ps.72,000, i.e., with each category of income being subjected to a separate schedular tax. 20. The "globalization" has been largely deferred from taking effect in 1965 because of the exemptions granted. For all practical purposes, the new global tax will apply almost exclusively to wage incomes. The maximum marginal rate, which formerly reached 50 percent on salaries of Ps.840,000 per annum, now stands at 35 percent on taxable incomes in excess of Ps.300.000. Effective rates for the tvical taxpaver (married, three children) are about the same as long as taxable income does not exceed Ps.hO.000. Beyond that level- the burden for waze-earners is between 10 to 20 percent lower than under the former Schedule IV. Upper-income pro- fessionasI now wi 111 nny hetwteen IA to '4O nperrnt, less than nreviously. 21.ied-Ffectr,.- Thc net+ -xiplei Pff'pt-. o)f' tliiz rpfrorm prnner nannnt easily be ascertained, and no comprehensive official estimate has been made. Some of the measures- suh aq the new rlohal tax. are of an untried nature. To measure reasonably well prospective revenue flows under pro- arpqive rPtp Hqf. b4hout the qi7e i.-,t.rihntion of taxable incomes would be required; such information for 1964 is only available with respect to enterprise.~TV ~ nsrto e1l~. n (which are not yet enacted), may also affect revenues. An estimate of the information provided by the tax authorities. 22. The various technical factors which must be taken into account .LL1 t:VC3.LUCLU., L1 1t: -L O-Ly~ U _ALJdC1.U V.L lm± LL1t_;V1IIr L.L.& 11-V.L1i1 CLV LJ1 U.L _LY %A_LO. cussed in Appendix A. The conclusion that has been reached is that the reform will not entail any increase in revenue but, on the contrary, kwLL result in a net revenue loss which is tentatively estimated at close to Ps.255U mlillone (S86 Ta016 XV.) - 7 - 23. For 196q. hnwpver- nrnsentR ar -emwhat hettAr aq the new system (which applies to 1965 incomes) will partly overlap with the old. vat. Thp +ivrh1 n'izfitCz +.ur violrlina qhA+. PCZ LAAf million in 1964, and which is always collected on an ex post basis (i.e., with no 9), fl-p-1awu Ar.n~ - ~ , -P1 - v,n , M. .."+ -P - I-n, +U.,, 4 -I, n + me";+ -P having simplified the system of taxing profits of enterprises. The VA1.L%JU0 CJJY0U%1 WYCZ0. 11UL, UJLLLy UJLk;t,-UA.1A&LY L;U1ULJLU.,~ UUUt _LU a..Lo exerCeu some undesirable economic effects, inasmuch as the distributable profits tax constituteU, in fact, a surcnarge on total profits and tne exces profits tax, originally devised to capture excessive profits during the Korean boom, more recently tended to paralyze the more efficient enter- prises. 25. One obvious objective of the reform is also to support the in- vestment boom in the private sector, now underway. The substitution by the distributable profits tax (on total profit) by the dividends tax (on profits distributed) aims at stimulating re-investment or profits, as does the tax-exempt status of intercorporate dividends. So far, the tax reform has been well received by the representative bodies of commerce and industry. 26. The rapidly expanding tax base, as a result of the industriali- zation process and the scope for further improving tax administration, make it possible to keep tax rates at moderate levels. But since the tax reform is likely to result in a loss of revenue, new revenue measures will still be needed to help finance public investment expenditures at the levels planned. The overall tax burden does not appear excessive. A rough estimate for 1964 indicates that tax and quasi-tax revenues only represent about 11.1 percent of GNP (12.5 percent if contributions to social security institutions are included). Section IV of this annex will discuss the alternative ways by which the Government may raise savings of about Ps.1 billion in 1966. 27. The present tax system does not yet conform to the generally accepted qualities which a tax system should display in regard to the distribution of tax burdens. vield elasticity. simplicity. Since further changes in tax structure will undoubtedly be introduced in later years, the last section of this annex comments on the main long-run lines of strategy which might be followed in moving toward a more modern tax system. - 8 - III. THE NEW FINANCIAL CONTROL MECHANISM OF DECENTRALIZED AGENCIES 28. The 1965 Revenue Act institutes a new mechanism whereby the finances of decentralized agencies will henceforth be controlled by the Federal Government. Though, technically, the Revenue Act only has legal force during the year itself, the measure will probably be incorporated in succeeding Revenue Acts. The system went into operation on January 1, 1965, and already encompasses 19 agencies. Among them are the major "investing" agencies, such as the Railways, the Power agencies, Pemex: as well as the two social security institutes (IMSS, ISSTE) and CONASUP0. It is expected that the other decentralized agencies will orogressively be encompassed by the new scheme. 29. In summary, the decentralized agencies are no longer entitled fd) frPinl NT id + +.hP-r P1r~nPr1t-iim-a rnnt +.1iinir mpqn-q nf' f-innpnnirr Flirt.1i- r- more, the Treasury of the Federal Government will now act as their cashier. 30. Before November 1 of each year, the agencies must submit their ,,-o cra+ o r rn v4 + I-a 14 TT- --fmr P 7LA , nf fv' amnr'k7+lo P,c , ±'~ ~k" ~ - JrVU U u.. *UL 9ULOU VL.V L'. ± V bM U tive Branch of the Government. These budgets will be subject to formal The financial accounts of the decentralized agencies will also be pub- lshedU Ux Posanb h Pbi Acout (uulta X-ubLiLLc1) . ite finaciLA_l situation of these agencies must now be reported regularly to the 11nistry o: Finance. 31. The importance or this new control mechanism and its potenti- alities for improving financial management in the public sector cannot be exaggerated. Previously, there existed a mechanism for authorizing pubLic investments (by the Secretaria de la Presidencia) but control over financing plans was imperfect, and not infrequently serious financial difficulties developed which were solved by such undesirable means as the accumulation of short and medium-term external debt, with now noticeable and serious consequences for Mexico's external indebtedness. 32. Much, of course, will depend on how the new financial system will function in practice, particularly since the intervention of the Treasury is pervasive, as not only investment but also current expendi- tures are encompassed by the new scheme. Thus far, the new system is apparently being administered flexibly and with dispatch, and not inter- fering with the efficient operation of the agencies. The efficiency of the new scheme will also depend on how the roles of the various departments, now engaged in reviewing financial plans and investment programs of the iP.nrai47.P1 nannipq ar nnonrdinated. Whilp thp nowPrq nf thA Miniq- try of Finance are greatly enhanced by the new scheme, and financial e-ntr+l fro- the public sntor a a wholp -ill now in fnt_ he entruted to the Minister of Finance, the powers of the Secretaria de la Presidencia and +he Secre+ari-p del Pn+.,4f% nf--i^nn1l Innwn nn+ hknmn Povwmnllyt nffooted by the new law. As previously, the Ministry of the Presidency will still -LI,LV.Lt _L~ LLIVVO L4II,LIU VU _CY * J'W_.Llr' LUV uli±' 11VkVY IUjLUJ _Ir C)Y ww _Uuk,VAI on the agencies and the control exercised by the Ministry of Finance, it car, ve expecteu thuat VoVoWu UILnfavtmnLVIa LVut, pIrUOPVUL,ViV L_UanUJWg pIanoGII will now be available to guide the decisions of the Ministry of the Presidency.) ie nr ins-"ry of NatIonal ratrimony wjAi±uA ein cluarge of checking a posteriori whether outlays conform to the budgets approved. kwnereas, owing again to gaps in information, these powers generally could not be adequately exercised under the previous system, the Patrimonia Nacional can now be expected to more actively discharge its role.) 33. Provided agility in the Treasury's cashier's operations can be preserved, the new system represents an important step forward toward efficient financial planning in the public sector. - 10 - IV. PROSPECTS FOR 196e-66 AND WAYS OF IMPROVING THE PUBLIC SAVINGS PERFORMANCE 34. Prosoects for 1965-66. Owing to the as yet inadequate informa- tion about public sector finances in 1964, especially with respect to the decentralized agencies, it is not possible to present a full set of re- liable projections of savings covering 1965 and 1966 for the public sector as a whole. It is. however. possible to attempt proJecting Federal Govern- ment savings. 35. Tables III (current revenues and expenditures) and IV (various sn;rmpnts of the innon tnx) show tlh nronctions nttomntPd by the miss4cn with respect to the Federal Government and the assumptions underlying the nrniections Gennrlly speaking, it has been assunmed tht b.oth 1964 and 1966 will be years of substantial growth, with GNP in real terms rising aot 6 n w per cent but with nrico aln disnlaying some upward nnainnur-r say, 3 per cent. With respect to income taxes, business profits taxes are sse d + r by ,h pe r + 4m 10--+ ( - - n + ^-f It-innITT noxrm r+: on 1964 incomes, which are expected to be large) and 12 per cent in 1966. jcvu v als tewbLJUL. s co u sion Cab±UU1A ~ U llt t .L % L l~. U LJ4 L10± 4. come tax reform. It is assumed that export taxes will further be reduccd. commodity import values. 36. On the basis of the assumptions made, current revenues of the Federal Government in 19o would oe 11. per cent above those of .yo1 ; whereas for 1966 a further increase of no more than 6.2 per cent i pr->- jected. Partial overlapping of collections under the old1ry inc: and the new income tax system (1965 incomes), accounts for the dissi r developments in both years. For the two-year period, the annual iurwave would amount to 8.3 per cent. Current Expenditures, on the other hand, are expected to rise in a regular fashion as they generally ai in tne past. Federal Government savings may be expected to rise somewhat, in abcolute terms, in 1965 but to decline in 1966 - unless, in the meantime, acaitional revenue measures are taken. 37. Other subsectors. With respect to other segments of the public sector, there is no firm basis for projecting savings in l965 and 1966, due to lack of 1964 data for most agencies. But it appears plausible to assume that in 1964 current savings were unfavorably affoted -by the stepped-up investment outlays made by several agencies. In 196.9, with the Govrnment now being endowed with potent means for financially controll1ig the agencies, the savings level in the decentralized sector should improve and resume what should be a. rising trend. - 11- _JU 6 lilt=: CUUVIC 1wL1_UV.J.U L U.dU(UJO L"U A-,_.~ LY Ulit: jJLJ ULU_L11 VilA OUdV_"rO u. those agencies, which are shown in Table I. The savings levels projected, 1owUv:r, OouU be regarUeU as n1o more Uhn rough oruere u1 magnituUe, suu- ject to wide margins of error. 39. Measures to Increase Public Savings. Whereas for 1965, public savings appear to be adequate for the reduced level or investment envisaged, additional savings of about 1-2 billion will probably have to be mobilized to ensure sound financing of the 1966 public investment program. This ':Ln- plies that action be initiated already in 1965. Measures which the Govern- ment could possibly take to achieve this goal are outlined below. 40. Income Taxes. Within the present framework of income taxes, i.e., pending further important changes in the structure of the income tax, three measures could be taken soon, or at least initiated. All three of the measures indicated would make the tax burden "more equitable". (a) The non-accumulation for purposes of the "global tax" of some incomes from capital could be discontinued in 1966. The efficiency of this"accumulation"is predicated upon adequate reporting of dividends and interest. (b) Taxes on property incomes could be raised. Though tax policy should continue to be aimed toward fostering the growth of private savings, maintaining almost uniformly low rates on incomes from capital is not the only, nor the most effective, way of pursuing this objective. (c) Progressive rates on upper-income taxpayers are now that the tax base is narrowed through several exclu- raised moderately, in steps, to, say, 45-50 per cent ton marinal raes; this u-ld still ranrentac nm- paratively mild tax burden on personal incomes. 41. It is difficult to gauge the yield effect of these measures, and "ILI "'.J -JUL%4A y1 . de %A UL.L- Op t' Call"rA U %= IA 't U UJ.1 vilt;_Ll- J.[1JFLt:L11=JAUCU_LWJ11. U.L.V V:1L the small number of taxpayers subject to the global tax, the accumulation featur and 1t4111 raiin of C the 11nominal rates woul1d no dramati1caUL,Ll_ly ices revenues, but could produce a Ps.100-150 million revenue increment. Prcperty - -- 1 .:). _ . *IA- - _ - n_ '7n,,% A Th~'n- 2....( ncomvIres in1 J7V4 y.±e.Ut:U U.UU U KZ. fVO 1fLL1..L_LU11*A ff"r"-~ i L U 11 Y-~U-L _L11- crease might be reached with moderate increase in rates. 42. The tax burdens on enterprises should not be increased in the near future. The rates on enterprises are already fairly high, especially as compared to those on individuals. In a developing country, a reverse re- lationship would be more in order, thereby providing incentives to retain and reinvest, rather than distribute, profits. - 12 - 14.1Ja.LU0 11A.&tVO. IL _LLt.O.Luclot; _Ln sa-u'O UCw D L.L 11 _)I U 7 jJ%± .l I and the introduction of a tax on luxuries and semi-luxuries that had origi- nally been pLanned for _l97 wuuld have yielueU sizeabue inreruea u n revenue. A one per cent increase in the basic sales tax would yield Ps.500-60o million. ine luxury tax also is capable of yielding substantial amounts, depending, of course, on its coverage. In WH-137a the yield potential of a similar tax was conservatively evaluated at Ps.>uu million. 44. Tax Administration. In recent years, steps toward improving tax compliance, and particularly the establishment of the federal register of taxpayers undoubtedly had a favorable impact on tax revenues. Host of the specific measures, however, which were recommended in VH-137a, some of which were at that time considered by the Mexican authorities, have not yet been implemented. In December 1964, however, the position of "General Adminis- trator" was created. He will be the top official in the tax administration field and will be responsible for more adequately coordinating the work be- tween the various tax departments. A new office, dealing with the "mincr" taxpayers, was also established. Better control, both of income and sales tax returns, could entail a sizeable amount of additional revenue in this sector. In line with the recommendations made in WH-137a, attention might now be given systematically to controlling those sectors of economic activity where evasion and underassessment are known to be substantial, particularly in the commercial, professional and agricultural sectors. The prompt intro- duction of automatic data processing eauipment would be particularly effective. Measures to improve administrative efficiency also constitute an essential condition for effecting future structural reforms of the tax system. t6. While any nuantification of thtir vield imnaet. remains coniectural. with effective action and with the awareness of control measures to improve nomnliann standards, a Ps.140-00 million increment in vilds annpears well within reach. 46. Rate Increases for Products and Services of Decentralized Agencies. I4T~'-in nn-h1 in 'qnvri nct. wouill of couirse, beP obtanined t.hrno-h in- creasing the prices of (and reducing subsidies on) products and services sol b,r Pe~Me., the Ra-r-als 1 -he Wr,+n .- qiinT-0-% nnrl +Th F i- Lr With respect to the latter, the tax on electricity, which for all practical purposes amn-untS to a surcharge on tl- he a4rens,A1 k. n c 'b economic justification of such increases and their scope were discussed at L U1 LL I I. ) . 14 z *L&Jen_L UU.~ LcV_L16 _L11 Wi,AI L .L.L .; IUL UUU U Ut, _L11.,.LrZCO; ii reducing current expenditures. Two fields of action are to be singled out. Urstov Ulere appea-- to ve some soetrracu ura xeuorax £ ~ ~ ~ ~ .u r UL ~ Lii JI~L U UU zsuiut Ouvpu L.L- vt.UUALi1g UU.L-.Lt,-1 U&t~jJiU11ULUU.E-U .1 several of the decentralized agencies. The new financial control of the de- centralized agencies should produce some "economies" in current outlays, but it would probably be erroneous to anticipate sizeable economies. Agencies with expanding activities face rising current outlays. The greatest potential of the new control law consists in the possibility it affords to avoid having recourse to inappropriate financing of further investment. - 13 - in reducing current transfers now made by Federal Government. As Table IV UL cates~ apart4 Lro III-hI D__. LJUW1A Ui9 U11UUULd. allu\. _1V~ Ii1OV1W are absorbing fairly substantial amounts of Government revenue to cover their operational ueicuts. Tihe uovernment is now considering measures Lu eUuce the CONASUPO deficit. As a first step, it has already been decided that support prices w-111 no longer be given to wheat growers in irrigated ZO!es. It is also anticipated that the subsidy element involved in present export prices of wheat, will be discontinued. Peasures already taken will probably reduce present subsidies by Ps.100-500 million, but more could be achieved through additional measures. Improvement of the orricial agricultural banks is also planned. 49. Total Possible Increase in Savings. The additional yield which the individual measures mentioned above might generate are summarized in the following table. The figures or ranges shown are of an illustrative nature. - 14 - Possible Yield Effect of Measures Discussed Ps. Million 1. Income Tax (a) Accumulation for global tax purposes, i.e., ) repeal of non-accumulation feature in 1965 ) Revenue Act ) ) 100-150 (b) Higher progressive rates, first stage of ) increase (c) Increase in property incomes 150 2. Sales Tax One point percentage increase 500-600 3. Luxury Tax As originally conceived by Government 200-250 4. Tax Administration Several measures (for discussion see text) 150-200 5. Price increases. Pemex 550 Railways 350 Wae 90.0 160 (. RpHnuMnn mf (IiiCrrPnt rnpnditures 100 C/\A r iTTcm e in a ai ffo r Aglie innMexico City a znAsrcommene in'laxa ihajutetfr eelo sbiyo gasoline in Mexico City. pu. Though all these individual measures appear recommendaoLe on general economic grounds, it does not follow that all of them ought to be implemented shortly. The total yield from measures listed here is far in excess of the Ps.1-2 billion target, mentioned earlier. Furthermore, all measures do not deserve support to the same degree, when considerations other than yield potential are taken into account. increases in indirect taxes (other than the luxury tax), for example, would further tend to aggra- vate the present regressive features of the tax system. From an equity point of view the measures mentioned with respect to the income tax or the institution of a luxury tax, would be preferable to an increase in the sales tax rate. - 16 - V. COMENTS ON LONG RUN TAX STRATBGY in recent years, Mexico is still in the process of evolving a tax system i.e., fairness, simplicity, yield elasticity and compatibility with econumLc growth 0 bvjUev.LV U ilnU JJIee1U tiUioLnL aU1[Ump"j UU LLaucL4e, albeit in general terms, the broad directions into which further changes 52. In recent years, the income tax system underwent two important, though partial, changes. Since modifications in tax legislation always involve some unsettling effects, as they require a readaptation to new rules by both the taxpayers and the tax administration, further reforms of only a partial nature should be avoided, if at all possible. 53. The income Tax. One test of a sophisticated and modern tax system is whether the income tax applies progressive rates to total in- come, thus acting as a partial counterweight to regressive indirect taxes; whether two conflicting aims, viz., a moderate correction of income dis.- tribution and the need not to interfere with the capital formation process are adequately reconciled; and whether the administrative requirements are consistent with the administrative resources. 5h. In Mexico, the income tax, exclusive of the employees' payroll tax for education, produced 40.8 percent of the 1964 Federal Government revenues. But on account of the limited range of the nominal rate pro- gression, the lenient treatment of incomes from property and the uneven distribution of evasion opportunities, the Mexican income tax is, at best, moderately progressive only over limited ranges of income and probably regressive over several others. Furthermore, with low burdens being imposed on upper-income taxoavers. the hiah vield of the income tax system is only achieved by extending coverage to the great number of taxpayers with modest incomes, with each nf them nntributing a small amount. It follows that the Mexican tax system basically is not geared to redistri- butive nuron.e. Redistribution in Moion is nur.qni throuh unch measures as social security schemes and profit participation for employees. Theredstrb itv _ffP_n+. r)f Tiescems,hwevesmr_ , pnPT-n11xr nyp rnthe r erratic and "horizontal," in the sense that the largest contributions are not n efc ni mand the upperaice elfares l andthat te linei tsn accrual of benefits and the comparative welfare level of recipients is ELn - 17 - *5. One of the avowed aims of the income tax system. as it emerges from the recent reform, consists in stimulating savings and investments. The philosophv underlving the oresent system annears to be that low rates on property incomes and on upper-income taxpayers, i.e., on those who have the canacitv to save- will_ in fart- l-ad to hiph savings nerformances. This may not necessarily follow in an environment of pressures towards hig opl rnsqio+in leverlsc wheren ntsaig "or nyI art"+ialyI -t C-q-r The precise objective of stimulating savings and investment might be bette a c e IT +1-e 4- - ., _-4 A 4- +1-+- -1, n4 v 1 cic. of taxation are coupled with selective tax reductions for particular forms savings actually occur. 56. A dramatic shift towards a system whereby high marginal rates wTould applJY- tO tll-( upe:-n ~C_La5,iU WQu_ld be inapJ1Qpopriatf7e Mico' s.- vulnerability to capital outflow, and the need to foster the further growth of transferable savings, indicate moderation in establisning pro- gressive rates. The existing high degree of income inequality in Mexico which, according to some observers, might even be widening, is offset to a degree by the "horizontal" redistributive mechanisms already referred to and through a fairly remarkable degree of social mobility. Neverthe- less, shifting the income tax burden relatively more to upper-income tax- payers would have .several benefits.. ipart from its redistributive.. .. aspects, without any adverse effect on the overall yield from the income tax, A large number of taxpayers at the lower bottom of the income dis- tribution scale could be freed from income tax obligations, thus reducing the heavy workload on the tax administration. With respect to enterprises, for example, Table XVI shows that about 95.5 percent of all enterprises paid an average tax of only Ps.10 in 1964. Their aggregate tax contribu- tion represented no more than 2.6 percent of total yields from the former Schedules I and II. Even admitting that the average tax could be in- creased somewhat if evasion were adequately checked, the costs of administering these small taxpayers are excessive. 57. The newly adopted system of taxing business profits represents a great improvement over the former system (see paragraph 16). But applying a whole range of progressive rates may not be appropriate for taxing such profits. It may, in some cases, lead to a tax-induced split- up of productive units; it may furthermore hamper the expansion of small but growing enterprises. With Mexico moving further towards a global-tVpe income tax on individuals, the present tax on all business profits might be transformed into a basically Droportional tax on corporations, with un- incorporated business units and possibly partnerships being made part of the individual income tax. An increasing number of enterprises in Mexico display the characteristics of the typical "impersonal" modern corporation, such as differentiation between managers and shareholders-owners. large volumes of production and some reliance on capital markets, quite eligible for modern methods of asessment. In 14-117:4 a sugageSted svAm for taxing corporate profits has been outlined. 58. Apart from giving less favorable treatment to property in- comes generally, there is also scope for revising drastically the system of taxing capital incomes. As Table XIV demonstrates, the present system is excessively complex. There exists a large number of discriminatory rates on different forms of savings, though the small spread between rates cannot possibly affect greatly the taxpayer's allocation of financial resources. The present discriminatory system suffers from two other defects. By differently affecting the rates batween gross (before tax) and net (after tax) yields, it interferes unduly with the free flows of investible funds. Some discriminations are clearly justified in any tax system with a view, for example, of channeling savings towards high- priority investments. But when, as in Mexico, the institutional frame- work for transferring savings has already reached fairly high degrees of' development. it seems preferable not to unduly distort market conditions through discriminatory taxation, thus leaving more scope for resources to be used where they fetch the hichest return. Furthermore. thouch Mexico has not yet developed a fully-fledged capital and securities market, in recent years ennconmainadvances have ben made into this direction. Several examples (such as the differential rates between dividends and i ntPrP.+- n-r hpt wp.n nn-s rl cP,ivi+.ir iriplrl.q' t'-mild 'ihP nir l )i which suggest that the present system of taxing income from capital does not t-nfe-wrm +-n M TlMI I _C+nh1 li chlnA c~+Y! arr ^-' A=r _ 0j o uelon-ing a cani+al market As evasion on account of bearer shares has traditionally been very sub- L, U.LSU _LL, I,lall .L7VJL IU-~LU±111 P.L-VV_LLrU U L U3~ Lul LuJV U Uj. IA~ullt u oL±UL LL_ profits tax, dividends from bearer shares would be taxed at the source more unless the shareholder identifies himself. The next tax law abolished the spread between bearer and nominative shares. The tax authorities, however, can request the banks to submit lists of dividend recipients. The "infor- mation" system now available is more cumbersome and less evasion-proof than the former rate differential. It would be inappropriate and un- necessary to Co away with bearer instruments; they snould not, however, become a privileged vehicle for evading taxes. 60. Other Taxes. In the longer run, proper attention ought to be given to reforming the sales tax system. The substitution of the present multi-point turnover system by a single-point tax which would apply basically to the manufacturers' level was suggested in WH-137a. The tax system would thereby greatly rely on three broad based taxes - the incomle, sales and import taxes. This would allow abandoning some of the produc- tion taxes which, apart from having possibly some unfavorable economic effects, are also characterized by a low yield elasticity. EVALUATIUl! U 1, IEL) =rEUT UF TIE iNUUXl, TAA REFFUd1 1. In order to insulate the effect on yields exerted by tax reform Droper from that of other factors, such as GNP growth or improve- ments in tax administration, it is assumed that the rates and other parameters embodied in the new law apply to the same "macroeconomic" tax basis, on which cash receipts in 196 were predicated.. It is also assumed that the ratio between pay-as-you-go prepayments, made during the year when income originates, and total tax liabilities will be the same under the new as under the old system. This is plausible as regulations concerning the timing of installment payments were not modified. This Appendix first appraises the effect of legislative chan7es on profits taxes, and, subsequently, discusses the factors affecting the yield from income taxes on individuals. 2. On Enterprises - The new tax on total business profits carries higher rates than the old "basic" tax in Schedules I and II. On the other hand,, the disanpearance of both the excess profits and the distributable profits taxes entails a rather sizeable revenue loss for the Treasury. The distributable profits tax. however, will, from a revenue point of view, be partially reolaced by the tax on dividends on shareholders. 3. The yield differential between the rate schedule anlving in the new tax on total business profits, and the former Schedules I and II, has been evalu:;ted by the Ministry of Finence. on the hasis of a samnle. covering about 60,000 out of a total of 805,048 taxpaying enterprises. This nomnptation is shown in abrided vp.rqn in The XVIT. Effective tax rates remain unchanged when taxable net profits are not in excess of Abouit. -Psz_c:_nn0 -n pa , i:e, for the gpreat+ majiori +1- ofP szT+.rnqq the "minor" en'.erprises. At higher profits levels, the new tax rates carry effective tax l i nhi Ii ti es beta - n 1 4 tn 20 npr cent. Phve the ones prevailing under the previous system. A small number of enter- prises. ihichrjuding f-rom the saprnle, acnted.cr for aot3pernt. of revenue in 1964, will have to pay about 8.5 per cent more than under the old s-ten. Table Vf7T shw tha~~t wbe agra4n al br_-ck_1tS revenue would increase by Ps.372.5 million, or 11.3 per cent more than ,,,.Ann +h, ,lA , nk ,-n T aTA TT As n akl VITT +-+,I yield results from multiplying average tax liabilities by the number of Uan_"Fja ± 0 Lii K-,a_,L L U.L U-L,,-- 1 2%.;*1t-U, UIie sOamn~le kdoes not ac o n forW ± all revenue collected in 1964 under Schedules I and II, which according to0 Tabl e 'T'T 4-une to -?s 4fl 3".mllo . is aplyn the- -I - ncr 1 cent average increase, derived from the sample, to the amount by which uwt tar l i arrived at in. te sample, falls so of1914 ctmUilL, an upward adjustment of PsSh5 million is in order. 4. The excess Drolit tax which yie-Lde. Ps.1a miiion in IYo4 on 1963 incomes will also disappear1/ but, to a degree, it will be replaced with the tax on dividends. Under the old system, industrial enterprises were entitled to request exemntion from the distributable profits on reinvested profits. This exemption was granted very liberally,-frequently up to 100 per cent of reinvested profits. Thus, the new law, on this count, will not greatly affect tax yields on dividends from industrial enterprised. The new system,withh its built- in incentive for retaining profits, is likely to influence the ratio of distributed to total profits in commercial enterprises. Further- more, the new dividends tax, for all practical purposes, carries a 15 per cent rate, whereas, under the distributable profits tax, non- identified bearer shares were taxed at 20 per cent, as against 15 per cent for nominative shares. Finally, intercorporate dividends, as well as stock dividends will henceforth be tax exempt. 5. How these various factors will affect the flow of taxable dividends cannot accurately be predicted. The tax on dividends, however, no doubt, will yield substantially less revenue than the distributable profits tax, as the latter tax applied to total profits. Considering all factors mentioned above, it appears reasonable to forecast for the dividends tax 4O per cent of the vield formerly derivinE from the dis- tributable profits tax or Ps.212 million. 6. On Individuals - With respect to individuals, the following factors must be taken into ac.nUnt: a) Eff'!-tive tiy raf.; on npt nrofe.sional incnmen are atl.- reduced. As compared to the previous system, present tax libltisfrthose not subject to the globaln tax- are9 'no%, from two-thirds (lower brackets) to one-third (higher brackets), ~, i r,~~& Schedule IV, therefore, is bound to decrease substantially. Tn f.hp ancen of -n qi,7 taxable-mAn r%P i l we may put the average reduction in yield at, say, 40 per ce~nt r fr v t~h-is~c~-,r -fI ~ ~ a .i,, + 'PQ I million. b) Rentals are henceforth also taxable when, per unit, they ..' I . a per Jumou, no axO"1DU 1DoLjV%. J 1V VIUMD± This will add a fairly large number of rented units in yield effect of this measure, but its positive effect Obviously wiJll betmnor 5 In 196,, however, this tax will still be collected on 1964 incomes. c) I lV RU U _ 1 l" ILUW u.LQLkLJ- Ud_1 U.' _LUWt;;. U11LL1 U11Ubt, jJ.FV_VUb.LY prevailing on wages. The proportional reduction in tax liabilities is even larger with respect to the incomes of professionals. The number of taxpayers receiving high salaries (including "remunerations! of corporate officers), however, is small. The tax authorities expect that only about 0,000 persons will obtain taxable incomes in excess of Ps.150,000. And among them, many will be receiving salaries in ranges where no tax reduction occurs. In the absence of any reliable information, we may surmise that, on the average, about 4,000 "well-to-do" taxpayers will pay on the average Ps.8,000 less. The loss to the Treasury can therefore be evaluated at Ps.32 million. d) An option is afforded to taxpayers with taxable incomes between Ps.72,000 and Ps.150,000. This will have a negative effect on yields, as these taxpayers will be tempted to opt in favor of the more favorable of the two alternatives, the global-personal or the schedular-impersonal regime. Computations of tax lia- bilities of hypothetical taxpayers, eligible for the option, however, indicate that the difference between the two alter- native methods is not substantial. The number of taxpayers in the Ps.72,000-150,000 income range, however, is, no doubt, much higher than in the brackets in excess of Ps.15O.000. Even if. on the average, only one out of two taxpayers elects the global svtPm_ and thRrAhY qavP. onlv P._1000 with. say. 200-000 eligible taxpayers, the net loss to the Treasury would already amount to Psqj1o million Not all trnnvers will tnke the trouble ofj figuring out how to minimize their tax liabilities and. in +hia nabann, r%P anyr b+t e mgn+han)d r%P oz+.4mm n+.n wo mn y perhaps assume that, on this count, the new law will result in a r,.',, e n 1 ow sso a kou,,+ P.s8- 4-l"Jllion. M)Te globaliza tion of ia1osncomes geta o upper income levels, in principle, should counteract or peraaps - - - -rn - -r, - - - -. - - , a-+ - - r - vn ++ a - 1 -'sa' -~e + ,o + n .+ for the upper income taxpayers. Owing to measures in the unimportant incomes from capital will, in fact, be added to sala ies TisL 1P.Lus Luem,L U-U .LU.L_t= _Lj VULLLIUL UU Vt', Z)1JiLCL 7 O*umming up, utreore, it can be aU tuha UuV r-UUn tax reform not only does not provide any additional tax revenue, but can be expected to result in a revenue loss which, according to Table XVI, can be put au about Ps.250 million. STATISTICAL TABLES Table No. External Public Debt 1. External public debt outstanding including undisbursed as of JTune In -oI.41.-, ~ .A44-4- T,,-I, -1 - ~ L /, - L4 w -L .u l l 11 I j v l~ _L 1. U_W 3 U J y .L~~ 1964. 2. Estimated contractual service payments on external public debt reported additions July 1 - October 31, 1964. National Accounts, Production and Prices 3. Structure and growth of real gross domestic product by industrial origin, 19)5>-1yo4. 4. Gross domestic product and expenditure in current prices, 19o- 1966. 5. Wholesale price indices in Mexico City, 1960-1964. 6. Production of selected agricultural commodities, 1962-1964. 7. Structure and growth of the manufacturing sector, 1955-1964. Balance of Payments 8. Actual and projected commodity imports by major categories, 1962-1966. 9. Actual and projected balance of payments, 1962-1966. Investment and its Financing 10. Estimate of resources available for public sector investment, 1963-1965. 11. Public investment by major sectors, 1962-1964. 12. Financing by the banking system of the public sector, 1962-1964. 13. Changes in credits and investments of the banking system. 1962-1964. Table 1: MEX1CO - EXTERNAL PUBLIC DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF JUNE 30, 1964 WITH MAJOR REPORTED ADDITIONS JULY 1 - OCTOBER 31, 1964 Debt Repayable in Foreign Currency (In thousands of U.S. dollar equivalents) Debt outstanding Major reported Item NJune 30, 1964 additions Net of Including July 1 - undisbursed undisbursed October 31, 1964 TOTAL EXTERNAL PUBLIC DEBT 11533_428 1,861,511 o0o Publicly-issued bonds 86.086 86.086 1/ - Privately-placed debt 1,005.267 1.072.329 - Supplier's credits 493,805 519,49 - othpr ;i11i62 qq1.280 - TRPThT n .-2 1 -4j,()I IDB loans '1 KK A- A nQ 'CY IT, 0~ . CoLvernen4 Ifh~J. caslr 7 .3 a.O 7 Export-Import Bank 121,33 175102/ 23,750 A Tn TI'A ,A -I 1C) rco Ef7 EfQ 1, o .M.LIJ, LJi ~ ± ~ ~ .L,L governments 14,687 14,687 - Germany iz,35 12,1 3- Italy 2,552 2,552 Nationalized properties 7,384 7,384 - If in the absence of data from Mexico, this figure is assumed. Does not include $90,000,000 authorized by Export-Import Bank in July 1961 for which no agreement has been signed to date. Statistics Division IBRD-Economic Department January 13, 1965 Table 2: .EXICO - ESTDIATED CONTRACTUAL SERVICE PAYMENTS ON EXTERNAL UbL1U IDEBT UUTSTANDING INULUDLGi UDBURED AS OF JUNE 30, 1904 WITH MAJOR REPORTED ADDITIONS JULY 1 - OCTOBER 31, 1964 1/ Debt Repayable in Foreign Currency (In thousands of U.S. dollar equivalents) Total Debt Debt out- standing Payments including undisbursed Amorti- Year January 1. zation Interest Total 1964 1,840,676 2/ 356,395 75,954 432,349 196 1 , 06 38nn(, 3b A 77 -h ini-9n 1966 1,414 484 232,793 69,805 302,598 1967 I 1 A 18 79 C9 ,AA 4,9A 4n 1968 993,521 170,833 50,192 221,025 10o I02 I, 117 110 ). 700 170 RAR 1970 686,497 1010,58 36,053 137,111 1 071 EfAA not R Ano W1 70n 1-17 Unfo 1972 499,608 73,549 26,060 99,609 1974 362,717 54,797 18,540 73,337 1976 263,327 36,341 13,119 49,460 _L f4&U YUU "L~y . L, , D 1978 192,893 32,292 9,272 41,564 1/ Includes service on all debts listed in Table 1 Prepared January 13, 1965 except for the following items for which repayment terms are not available: Privately-placed debt $ 14.085.000 U.S. Govt. lend-lease 6,750,000 $ 20.d35.000 2/ Amount outstandina for 196L is as of June 30th: the service payments are for the entire year 1964. qtQtiD tn Dvimint IBRD-Economic Department Jannin?r 1l- 10A4 Table 3 STRUCTURE AND GROWTH OF REAL GROSS DOMESTIC PRODUCT BY INDUSTRIAL ORIGIN, 1955-196 Share in Annual Percentage Change 1963 Average Average 1955-59 1960-63 1963 1964- 100.0 Gross Domestic Product 6.3 5.8 6.L 9.9 9.1 Aericulture 2.9 3.9 1. 7.5 6.3 Livestock I.0 3.8 .O . 0.3 Fnrestrv PAh nh 93 67 Pi2 Fshing1 11-7 6-7 r.2 34 -A Mining 0 3. .u r 4 ana A. , f. 0.0 Communication 23.6 Trade 6.0 5.8 6.3 11.0 .1 Government 3.9 5.9 5.2 8.0 20.6 Other Services 7.2 6.8 6.3 7.7 1/ The figures for 195-1963 differ slightly from those of the Bank Report No. WH-137a, because of official revisions in the data. 2 Preliminary. Source: Bank of Mexico and Finance Ministry - Bank of Mexico Working Group., Table GOS DOMES~TIC PaIDUCT AND EXPEj2NDITURE.~ iN CURRENT PRICES, 1962-1964 (M$ BILLION) 1962 1963 1964 1/ Gross National Product 177.5 192.2 224.6 Factor payments abroad 2.3 2.6 2.8 Gross Domestic Product 179.8 194.8 227.4 Imports of goods and services 16.2 17.6 20.8 Exports of goods and services 17.5 18.9 20.3 Gross Domestic Expenditure 178.5 193.5 227.9 Gross fixed capital formation 24.8 28.0 36.6 Public (10.4) (12.4) (16.5) Private (14.4) (15.6) (20.1) Consumption 153.7 165.5 191.4 Public (96) (10.7) (12.0) Private (144.1) (154.8) (179.-4 I7 Preliminary. Source: Central Bank and mission estimates. Table 5 WHOLEbALE PR-CE INDICEE IN MPEXIUo GITY, 1960-1964 Percentage Change Over Annual Average (1954=100) Preceding Year* 1960 1961 1962 1963 1964 1963 1964 Total 1/ 127.5 138.8 141.3 142.1 148.1 0.4 5.5 Consuner Goods 139.8 141.1 1h5.6 145.2 151.9 -0.1 6.2 Foodstuffs 1L2.8 1L2.9 17.3 146.5 155.1 -0.3 7.6 Unprocessed 17.8 1h7.0 152.7 151,3 162.6 -0.2 9.2 Processed 130.0 132.h 133.3 133.6 135.6 -o.5 2.7 Other 132.8 137.0 141.7 142.5 144.6 0.2 2.9 Producer Goods 134.3 135.6 135.4 137.8 143.0 1.0 4.5 Raw materials 125.9 126.7 124.3 126.5 132.5 o.6 6.2 Metals 131.5 133.1 133.2 133.0 135.4 0.8 3.0 lh emi cl .s 1,0. 1 1.5 1.0 111[f ivin 113. .8 -1 1).1. P j 1.2 Paper 150.8 151.7 151.1 150.8 156.0 -0.1 3.8 rConst--ruction material 16.-9 '1t 7 .6 163. n4).2 171..1 n .1 6,. 7 SJJu UIJ flJ'I.L.L.L LO- .L.P-' a7 J..1( l 4 -L,-,) .4 -LU/4 C- .LI4.-L U. U. t F uel- an r -9. * 13 17£.4 75 1 .- aý "oe0 2. I o u. Velhlicles and accessories 150.6 15)1.0 153.- 14 .1 18.3 0.5 2..7 210 commodities. Source: Bank of Mexico. *'Decembery to Decmber basis. idute u YrtUJUU1uKUl UP J,LUTSUJ AIUUJUTUUAL COMIODITIES, 1962-1964 1962 1963 1964 / Thousand Percentage Change Over Metric Tons Preceding Year Corn 6,706 2.8 8.8 Wheat 1,65 22.7 19.8 Beans 844 2.8 2.0 Rice 289 -7.9 0.9 Plantain 354 4.2 5.1 Sugar cane 19,742 12.4 12.2 Coffee 132 31.8 -3.4 Bananas 314 3.0 4.9 Tomatoes 434 6.9 5.2 Oranges 786 1.8 0.3 Sesame 158 0.3 2.0 Copra 191 064 0.6 Cooa 9 17 0 Cotton s 2e380 -13n 11 l Henne-uen I156r) 71, j Thousand bales. Source: Bank of Mexico. Table 7 STRUCTURE AND GROWTH OF THE MANUFACTURING SECTOR, 1955-196 Value Added Annual Percentage Change in 1963 (billion pesos Average Average , at 1950 prices) 1955-59 1960-63 1963 1964 A" 20.6 Total Manufacturing 8.4 6.9 9.2 13.3 5.7 Food and beverages 6.7 7.3 5.2 10.3 1.9 Textiles 4.3 3.6 9.2 17.2 1.3 Clothing and footwear 4.6 4.1 6.6 10.3 0.4 Leather and leather goods 2 4.6 2.6 4.6 1.7 0.5 Wood and cork products 4.0 -3.2 7.9 17.9 0.4 Paper and paper products 8.1 7.7 9.3 12.1 0.4 Printing and related 0.9 Non metallic minerals 8.3 7.4 11.0 17.9 2.9 Steel and metal fabricating l4.4 5.0 15.1 9.0 1.2 Machinery 14.0 9.8 11.1 17.) 0.o Transport equipment 8.7 10.5 12.9 35.0 0.4 Others 8.4 6.o 9.2 13.3 1/ Preliminary. 2/ Excluding footwear. Source: Bank of Mexico and Finance Ministry - Bank of Mexico Working Group. Table 8 ACTUAL AND FPROJEUTED COMMIODITY IMPURTS BY MAJOR CATEGORIES, 1962-1966 (US$ million) 1962 1963 1964 1965 1966 Consumer goods 229 283 290 296 302 Intermediate goods 378 416 488 517 568 Capital goods 536 541 710 677 7C0 Total 1,143 1,240 1,488 1,490 1,570 Annual change (%) 8.5 20.0 - 5-h Consumer goods: Based on assumntion of 2 nPrcent annual increase. Actual annua1 increases were: 1951-1963 3.3% 1960-1969 1_6_ 1963 23.5% Trn+.P-rmi'rH P .o (Y n1z Pn pr nn -no irT+ rny +.bim+. mn vf n c't- , --fn ii,A n- ,r i I I rise by 10 percent per year, and that intermediate imports are 14 percent of' nralu a,dAi nuct Actual relations were: 1951 25.5% lodA 01 9 1961 15.1% I n4o e I). EW 1963 14.0% -LYU4 14.,5 1o The annual increases thus work out at 6 percent in 1965 and 10 percent in vapit a ouuo. u Fo 17u u6o. u on e assumption uf a 2- perucen Uecueiv in public investment (which in 1962-1963 had an average import content of U2 percent/ and no cuage in private investmltwi,kUal" C au an import Countu of about 25 percent in the same years). Table 9 ACTUAL AND PROJECTED BALANCE OF PAYMENTS, 1962-1966 (US$ million)Y 1962~ _1963 19616 966 Mission Revised Mission Revised Mission Pre- Mission New New Actual Actual Pre- Actual Pro- liminary Pro- Pro- Pro- liminary Jection Actual jectio.n jection jection Exports of Goods and Services 1,587 1 587 1,703 1,709 1,765 1838 1,858 1,92 2,020 Commodity exports 2 900 899 939 ~~973 1,02h 1,oo 1,070 1,120 Production of gold and silver 3/ hh hh 50 51 50 48 50 5o 50 Tourism and border trade 3/ ~ 585 586 654 657 700 702 759 750 80o Tourism (179) (211) (239) Border Trade (407) (446) (463) Mligrant worker remittances / 32 32 35 30 30 29 25 15 15 Others 5/ 26 26 35 35 30 36 30 35 35 Imports of Goods and Services 1,680 1,756 1,8o6 1,915 2,002 2,201 2,147 2 250 2,365 Commodity imp>orts 6/ 1,1- T;_,13 ¯~2~ 1,4 1"8 ~-8 1,6 1 ) 157 Border trade 5/ 214 2145 265 265 286 276 309 280 290 Tourism 5/ ~ 35 76 39 84 46 102 51 115 125 Interest and profits on foreign investments 5/ 159 159 158 186 176 197 190 200 210 Interest on offi-ial debts 7/ 5h 5h 55 5h 6>4 5 80 80 85 Others 5/ ~45 80 49 86 50 84 50 85 85 Balance on Current Account -93 -169 -103 -206 -237 -363 -289 -330 -345 lhort ter capital,error,s and omiissions -151 -73 -134 2 -38 104 - - - Short term capital (-85) (-4l) (6) Errors and omissions (12) (51) (-110) Direct foreign investnents 5/ 128 126 117 117 133 150 143 160 170 Increase in official reserves (net) 8/ 17 17 69 110 65 31 80 30 - Gross long term borrowing 9/ hol 4o1 425 421 437 671 421 575 455 Amortization of long term foreign credits 7/ -268 -268 -236 -231 -230 -324 -195 -375 -280 Net long term borrowing (133) ( 33) (189) (190) (207) (317) (226) (200) (175) rootriouezi Uo aoauey I/ ission,, refers to the figures contained in Bank Report wh-jj[a (An Appraisal of the Development Program of Mexico). After that report was issued (July 13, 1964) the Government of Mexico revised the balance of payments data for 1962 and 1963. Besides, actual events in 1964 in several respects differed from the projections of the report., Consequently, new projections were prepared for 1965 and 1966 (which had not been covered in the Bank Report referred to) by the Bank mission that visited Mexico in early 1965. Of these, the projections for 1965 were reviewed in detail with officials of the Mexican Government, who are in general agreement with the assumptions made, and the orders of magnitude of the results. The 1966 projections are much more tentative and were not discussed with Mexican officials. 2/ Projected on the basis of annual increments of about 4.5 percent, against increases of 4.1 and 9.4 percent in 1963 and 1964 respectively, and of 5.0 percent between 1960 and 1963. Based on the assumption that the most important factors making for expansion in 1964 were of a non-repeating nature, i.e. that sugar, wheat and corn exports - which together accounted for over half of the total increase in 1964 - may maintain their present level but not expand more than moderately in 1965. 3/ Based on mission projection and recent years' experience. 4/ Based on assumption of fairly rigorous application of new restrictive legislation on +.hp use of' brqrhrn.-,It in thp Unitp.i S_qtP,_ Al q, Tnh I I! for interest payments on private sector debts carrying official "I Ti-, 4 i~- In- ,+m.~c forsv c-St4rn+pA nc minimum target level for official reserves. 9/ For 1965 and 1966, residual based on amounts needed for equilibrium in valaue of payneutse Nvut vau un. esbcuve u1 amounts available under present and prospective commitments. In the judgement of officials ofteGvrmn fMeic -lnz' Ii --i-l ---- A ..---- . une Lxuverumenu 01nexu, L yU _LU WJL.LL Ue pubAoe AUW uraw oVt.L US$500 million, and the mission concurs in this estimate. But for 1966 substantial additional commitments would have to be made on a project basis, or substantial additional general purpose borrowing would have to be undertaken, to maintain the level of disbursements projected here. Table 10 ESTIMATE OF RESOURCES AVAILABLE FOR PUBLIC SECTOR INVESTMENT, 1963-1965 (Billion pesos) (in current prices) Estimate Projected 1963 196L 196 1966 Savings of Federal Government 1/ 3. 4.7 C 14h Savings of other public sector 2/ 5.5 4.5-5.4 5.' (7.4)7 Total, ptblic sector savings 9.0 9.2-10.1 10.7 (12.3) Amortization of external debt 3/ -2.8 -2.8 -4.2 -3.2 Fina~r.c%a 1--rTreU.nt 11/ 4 Il A'. Total. subt.-' jons CAC U10J110 4 4 -4.L4 ).U 4.) r_Uv_Lcs cour saviugs available for investment 4.6 4.8-5.' 4.9 (7.5)/ imes.uLe burrowig from vanks / i.U ) .-4.3 c.u 2.' Gross foreign borrowing 6/ 5.1 7.5 6.3 5.1 Total resources available for investment 11.5 10.2-17.5 13.2 k-W.CJ Statistical discrepancy 0.9 - - Estimated actual investments 12.4 n.a. n.a. 1/ See Annex on Public Finance. 2/ Id. The range for 1964 is based on qualitative information about the performance of the maior decentra1izi a genci s, 3/ Based on balance of payments (Table 9) with following waju+ments: for 1964 the US$75 million debt prepayment to the EXIMBANK was subtracted, since it reoresents a Bank of Mexion +asco+ constitutes no charge on public sector savings. For 1964 to 1966 10 percent of the remaining hlance of namen+ igu- e subtracted, to account for the private long term debt component. This, in reality. apears to have been slightly i j " -'i 4/ Bank Report WH-17a estimate for 1043 AT furter ifr available. 5/ The range for 1964 is based on Table 12 (lower limit) plus the un- known amount of deco+ m *ca bank fp ,mm, LaLfvanUancUng orE puoiic sector / (continued). entities, (i.e. bypassing the Bank of Mexico). These transactions, which appear to have been negligible in previous years, may have reached up to about 400 million pesos; included in this estimate is the financing through contractors who, according to some reports, had to permit the level of public sector accounts outstanding, to rise appreciably in 1964. The 1965 figure is based on the assump- tion that GNP may rise by 10 percent in current prices (6.5 percent in real terms); that total bank financing could rise in the same proportion (M$7.2 billion) and that less than 30 percent of this should be devoted to financing the public sector. The corres- ponding proportions in previous years were: 1960 20% 1961 31% 1962 40% 1963 22% 1964 36-39% 6/ See Table 9 adjusted downward by 10 percent for 1964-1966 for private lone-term borrowing. 7/ Proiected investment tnr7et. Finnninp fimirp. in-livip nQiimntinr of additional revenue measures for decentralized public sector. Federal Government savins nmiri.In is made on n n.tion of no now revenie measures. Table 11 PUBLIC INVEST1MNT BY MAJOR SECTORS, 1962-19641/ (Billion pesos) Estimate Authorized Increase 1962 1963 1961 in 1964 Total 10.38 12.36 17.01 L.65 Transport 1.91 2-.34 3.17 0.83 .Ma~ J0 _1 %A%A V-1.I - Roads 0.95 1.41 1.59 0.18 Airports 0.03 0.05 0.06 0.01 Petroleum and petrochemicals 1.75 1.65 2.8h 1.19 Electric power 1.75 2.26 2.44 0.16 Agriculture 1.06 1.77 1.83 0.11 Manufacturing 0.27 0.53 0.99 o.46 Social services 1.98 2.23 3.76 1.53 Housing U.5) U.o U.o.21 Education 0.25 0.44 0.51 0.07 Public health and welfare 0.63 U.5U 1.23 U.73 Water and sewerage 0.55 0.62 1.14 0.52 Federal District 2/ 0.58 0.66 0.60 -0.06 Other entities 0.79 0.62 1.00 0.38 States and municipalities 0.30 0.30 0.33 0.03 SOURCE: Bank Report WH-137a and Ministry of Finance - Bank of 1exico Working Group. 1/ The figures for 1964 are based on the investment authorizations granted by the Secretaria de la. Presidencia by 31 March, 1964. Normally about 90 percent of a year's authorizations are granted in the first quarter. The figures can only be con- sidered indicative of broad orders of magnitude, since normally there is not very close correspondence between investment authorizations and investments actually realizdd. Nevertheless, the data shown seem to be fairly representative since: (a) the total corresponds approximately to the estimate of financial resources available for public investments (see Table 10); and (b) the main increases corresnond to sectors for which there is corroborative evidence (official imports statistics, selected financial data and contact with Mexican officials) of major expansions in investment. 2/ Excluding Pdncation housing. water and sewnrage. for which the Federal Listrict's expenditures are included under the corresponding headings for the total public sector Table 12 FINANCING BY THE BANKING SYSTEM OF THE PUBLIC SECTOR, 1962-19T6 (Billion pesos) 1/ 1962 1963 196h Unadjusted domestic financinL 16.939 18.587 23.167 Minus: Agricultural Development Fund 207 181 238 Financiny of official banks 21 362 21A CEIMSA credit taken over by Govt. 2,919 2,821 2,706 CMASTnn.rPO crlHit. thrnah CMIT 2/ P /hn Credit to Govt. for purchase of CMMT shnae i3 Financial support to CMCI - - 352 3,387 3,364 4,382 Adjusted total 13,552 15,223 18,785 Minus: of public sector to public agencies and enterprises 1,0 1,50o 1,191 Total financing of public sector by the banking system 11,942 13,715 17,594 Annual change 1,773 1,773 3,879 1/ Corresponds to Table 6 of Appendix D of Bank Report WH-137a with small revisions in the first line for 1962 and some additional adjustments (lines 2, 5, 6 and 7). 2/ Compania Mexicana de Credito Industrial, through which in 1964 some Bank of Mexico support for CONASUPO was channelled. Source: Bank of Mexico. Table 13 CHANGES IN CREDITS AND INVEST IENTS OF THE BANKING SYSTEM, 1962-1964 1/ Absolute Percentage Percent of Variation . Change Total Change 1963 19612/ 1963 1964 1963 19614 (hillion pesos) Total crpdit.- and investents 7.9 10.8 1.9 17.6 100.0 100.0 To~ enteprises~p and individuals 3/ 4.6 7.5 9.6 14.3 57.8 69.5 Investments 0.4 0.7 8.8 12.1 5.5 6.1 Cr 9.7 di.+ 2.3 73. Conerce (1.3) (2.2) 13.8 20.3 (16.8) (20.8) Industry (2.0) (3.6) 7 .1 (24us4 n.7) (337.4 Agriculture - livestock (0.9) (1.0) 11.9 11.9 (11.0) (9.1) To F-ed'erail Govrmen 3. 3.3 59. 36. nt. 30U.5 *I ~ ~ ~ ~ ~ ~ I -~r ~ I r , r Investments 1.6 5.2 3L.6 76.5 2U0 48.3 Credits 1.7 -1.9 391.3 -89.4 21.6 -17.8 1/ Excludes inter-bank transactions. 2/ Preliminary. / Includes state enterprises. Source: Bank of Mexico.
Группа Всемирного банка · Pre-2003 Economic or Sector Report
Mexico - Memorandum on recent economic developments
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Pre-2003 Economic or Sector Report
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