By Juan Montes 

MEXICO CITY -- Mexico's new President Andrés Manuel López Obrador unveiled Saturday a budget proposal for 2019 that calls for a moderate increase in spending without raising taxes or the country's debt.

The $289 billion budget plan allocates less money than had been expected for some of Mr. López Obrador's flagship investment and social programs in order to reach a surplus before debt payments equal to 1% of gross domestic product.

"We are trying to be very conservative," Finance Minister Carlos Urzúa said at a news conference after submitting the budget plan to Congress.

Government spending is set to rise 6.1% in real terms from what was approved for 2018, with revenue estimated to increase by 6.3% -- also in real terms. Mr. López Obrador says his administration aims to reduce corruption in the awarding of government contracts and be more efficient in tax collection.

"It doesn't contain any big surprises," said Barclays chief Latin America economist Marco Oviedo, who added that revenue projections at 21.2% of gross domestic product "are very optimistic."

Mexico's new administration expects the economy to grow 2% next year, in line with market expectations. The budget assumes an average price for Mexican oil next year of $55 a barrel, above the current price of $52 a barrel but below the $62 average expected for 2018. About 20% of government revenue comes from oil.

The budget is seen as an important test for the new president and comes at a moment when investors are concerned about Mr. López Obrador's policies after he canceled the $13.3 billion Mexico City airport project, triggering a complicated negotiation with the project's bondholders.

The peso has weakened some 4.5% since the decision to scrap the airport project, trading around 20.20 to the U.S. dollar, while government bond yields have jumped.

At first glance, the budget proposal looks realistic and reflects fiscal prudence, said Benito Berber, chief Latin America economist at Natixis. "It seems that the government eliminated previous social programs and decreased current spending in order to prioritize López Obrador's flagship social programs and investment projects," he said.

Mr. López Obrador, a leftist with a nationalist view of the economy, took office on Dec. 1 after winning the election by a landslide in July. He wants to lift the country's economic growth, which has been stable but modest in recent decades, by giving the state a bigger role in the economy through more public works, expanded social programs and higher wages for workers.

He has long maintained that government austerity, reallocating existing funds and combating corruption would free up enough money to support government spending.

As part of the austerity drive, Mexico's Congress recently approved a law centralizing all government purchases at the finance ministry. The purchase of computers and refurbishment of government offices will be forbidden.

Some of the president's key programs will receive less money than expected. An apprenticeship program for 2.3 million young people was expected to cost $5 billion, but the budget earmarks just $2.2 billion for it. A 930-mile tourist train in the Yucatán Peninsula will receive only $297 million next year, and a plan for free internet in public spaces just $30 million.

It wasn't immediately clear whether some of the programs are being scaled back, or if more money will be assigned in coming years.

The budget includes cuts in the salaries of top bureaucrats and in government expenses. The president slashed his own salary by half, while Supreme Court judges offered to cut salaries for new justices by about 35%. Government austerity is one of Mr. López Obrador's rallying cries, and he pressured judicial and legislative officials in recent weeks to cut their own wages.

Petróleos Mexicanos, the state oil giant where Mr. López Obrador wants to significantly boost oil production, is getting a budget increase of some $3.6 billion. The president also wants Pemex to start building a new refinery in his home state of Tabasco, for which $2.5 billion has been earmarked.

The budget requires congressional approval by year's end, but few changes are expected because Mr. López Obrador's party has a comfortable majority in both the Senate and the Chamber of Deputies, lawmakers say.

The budget calls for lowering value-added and income taxes along the border with the U.S., fulfilling one of Mr. López Obrador's campaign promises. Mr. Urzúa, the finance minister, said it would cost about $2 billion a year, less than what many economists have estimated.

Write to Juan Montes at juan.montes@wsj.com

 

(END) Dow Jones Newswires

December 15, 2018 22:52 ET (03:52 GMT)

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