President Miguel de la Madrid said in his annual budget message today that a sharp economic slowdown is necessary next year to contain inflation and enable Mexico to manage its large foreign debt.
While the full budget will not be made public until next week, the administration released an 88-page preface indicating that de la Madrid intends to embrace austerity measures recommended by foreign bankers and the International Monetary Fund. A courier delivered both the preface and the budget to the nation's Congress, which usually accepts the president's economic proposals with few changes.
De la Madrid said that the government would cut its budget deficit sharply in 1986, and would thus meet a target next year that it failed to achieve in 1985. The government plans to raise some taxes, increase rates charged for public services such as telephone and electricity, cut subsidies to state-owned companies and eliminate some existing government agencies, the president said.
The cost of the government's cutbacks will be a slowdown in economic growth, de la Madrid acknowledged. The budget allows the economy to grow by no more than 1 percent during 1986, and it may even shrink by as much as 1 percent, he said. That represents a substantial decline from this year's projected growth rate of 3.9 percent, and from 1984 growth of 3.7 percent.
The slowdown is necessary as part of the effort to restrain inflation and reduce the deficit, neither of which diminished as much as planned during 1985, de la Madrid said. He predicted that inflation would fall from about 60 percent this year to between 45 percent and 50 percent in 1986.
"In the past 18 months, there has been a halt in advancement of the process of reducing inflation and the fiscal deficit," the president said. "As a result, it is a priority to intensify the reordering process during 1986 with the purpose of again reducing inflation and the deficit in a significant manner."
The government was hoping that the new budget would help shore up the peso, which has plummeted recently against the dollar in the so-called "free market" used by tourists and in some other transactions. The peso has remained steady in the "controlled" market, used by most companies engaged in foreign trade, although a devaluation is widely expected in coming weeks.
The government also hoped that the budget would make a favorable impression on the IMF and on foreign bankers, to whom Mexico owes $96 billion. Mexico has said that it needs more than $4 billion in new loans from abroad during 1986.
While it seemed likely that foreign bankers and the IMF would be pleased by the thrust of the administration's proposals, the Mexican government has failed in the past to meet its own budget and economic targets. Apparently anticipating criticism on this point, de la Madrid said: "Public spending during 1986 cannot be less than the proposal, but neither can it be more."
One important domestic interest group that was unlikely to receive the budget favorably was Mexico's powerful labor unions. Fidel Velazquez, leader of the nation's largest union federation, said earlier in the week that the government needed to pump up the economy more than it has this year.
De la Madrid said that the government's overall budget deficit would be reduced in 1986 to 4.9 percent of the gross domestic product. In 1985, when the deficit was supposed to be reduced to 5.5 percent of GDP, it instead widened slightly to 9.6 percent.
The reduction in the deficit would be accomplished by increasing public revenues by a total equal to 1.5 percent of GDP, and by cutting expenses by a total equal to 2.4 percent of GDP, the president said.
While details were not available on how this was to be accomplished, recent Mexican press reports based on government leaks have said that the budget includes: a 10 percent surtax on wealthy persons; higher sales taxes for gasoline, alcoholic beverages and cigarettes; a 20 percent increase in telephone rates; higher electricity rates, and elimination of the Mexican Institute for Foreign Trade.
The president said the budget provided 500 billion pesos, or about $1.5 billion, for reconstruction following the Sept. 19 earthquake here.