Mexico faces huge revenue gap, tax reforms planned

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* Government faces 480 billion peso revenue shortfall

* Fiscal reform plan will accompany 2010 budget proposal

* Rainy day funds, spending cuts to help cover 2009 gap (Adds quote, details on spending plans, fiscal reform)

By Jason Lange

MEXICO CITY, July 23 (Reuters) - Mexico will have to cut spending and raid its rainy day savings to cover a 480 billion peso ($36.6 billion) hole blown in government revenues by the recession, Finance Minister Agustin Carstens said on Thursday.

The huge revenue shortfall underscores the severity of Mexico's deep economic recession, which could be the country's worst downturn since since the Great Depression.

"This could be the biggest single-year decline in government revenues in history," Carstens told reporters.

Despite the budget crunch, Carstens said he would propose a tax reform package to boost the government's non-oil revenues when he sends the proposed 2010 budget to Congress.

Bond rating agencies have warned that Mexico's credit rating could be downgraded due to excessive reliance on the country's slumping oil industry for revenues and puny non-oil tax collections.

Carstens said the finance ministry was still working on specific proposals for tax reform and did not given any additional details of the plan.

However, he did say that the government would commit to eliminating its budget deficit by 2012. Carstens recently suggested he favored relaxing Mexico's fiscal responsibility laws to allow the government to tie its budget to the economic cycle.

Mexico's economy has been hammered by a slump in U.S. demand for its exports like cars and refrigerators as recession-hit U.S. consumers put off big purchases. The government plans to run a budget deficit of about 2 percent of gross domestic product this year to help fight the downturn.

Mexico became one of the world's leading exporters after entering the North America Free Trade Agreement with the United States and Canada in 1994.

But its extensive trade relationship with the United States, which buys about 80 percent of its exports, has turned Mexico into the big Latin American country hardest hit by the U.S. recession.

SPENDING CUTS

To tackle the current budget shortfall, the government will cut a further 50 billion pesos ($3.8 billion) in discretionary spending on Thursday on top of a 35 billion peso ($2.6 billion) reduction announced in May

It also plans to tap its rainy day savings funds for another 92.4 billion pesos ($7 billion) and expects to earn 100 billion pesos ($7.6 billion) from hedges on oil revenues.

The rest of the revenue shortfall will be covered with central bank exchange profits, reductions in non-discretionary government outlays and unspecified nonrecurring income, the finance ministry said in a statement. ($1=13.22 Mexican pesos) (Writing by Robert Campbell; Editing by Phil Berlowitz)

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