Download Fiscal Institutions in Mexico: What Reforms are Pending?

FISCAL INSTITUTIONS IN
MEXICO: WHAT REFORMS
ARE PENDING?
November, 20031
Index
1. Trends in Fiscal Policy in Mexico
2. Fiscal Institutions: What has been Achieved?
3. Fiscal Institutions: What is Pending?
2
Fiscal prudence has been maintained since the early
1980’s, when Mexico led the emerging economies into
the debt crisis.
Economic and Primary Fiscal Balance
(percentage of GDP)
10
Primary Expenditure and Fiscal Revenue
(percentage of GDP)
Public Balance
Primary Balance
Primary Expenditure
31
5
Total Revenue
29
0
27
25
-5
23
-10
21
-15
19
3
2001
1998
1995
1992
1989
1986
1983
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1980
17
-20
As a result, net public debt has decreased as a
percentage of GDP. Mexico is currently a country with
relatively low public debt.
Net Public Debt
(percentage of GDP)
Net Public Sector Debt, 2002
(percentage of GDP)
50
Net External Debt
45
Net Domestic Debt
40
35
30
25
20
15
10
5
0
1990
1992
1994
1996
1998
2000
2002
Lebanon
Argentina
ôte d'Ivoire
Philippines
Jordan
Brazil
Pakistan
Uruguay
Nigeria
Indonesia
India
Turkey
Bolivia
Thailand
Ecuador
Colombia
Mexico
Peru
Poland
Venezuela
Rusia
South Africa
Ukraine
China
200
180
160
140
120
100
80
60
40
20
0
4
Index
1. Trends in Fiscal Policy in Mexico
2. Fiscal Institutions: What has been Achieved?
3. Fiscal Institutions: What is Pending?
5
The insolvency shock of 1982 had deep effects on
Mexican politics and the political economy of fiscal
management, but not in legal institutions.
The institutions that set the rules for the budgetary
process remain broadly unchanged in Mexico.
The Federal Constitution specifies four basic legal
fiscal institutions.
1.
Income Law (Ley de Ingresos Art 73-VII)
2.
Expenditure Budget (Presupuesto de Egresos
de la Federación Art. 74-IV)
3.
Public Debt (Endeudamiento Público Art. 73-VIII)
4.
Auditing (Cuenta Pública Art. 74-IV)
6
The Mexican authorities have gradually been
improving the fiscal process by incorporating the
following into the annual laws:

Indebtedness ceilings:



Limitations on the use of revenue:




External and domestic debt ceiling for the Federal
Government.
Limits on debt of States and other public entities.
Budgetary balance targets as a percentage of GDP for the
Federal Government.
Credit limits on development banks.
Targets in the financial balance of PEMEX and IMSS.
Budget management rules:



Quarterly revenue calendars to adjust spending in a
timely fashion.
Automatic spending mechanisms which reduce outlays if
revenues decrease.
7
Quarterly evaluation of the targets set to public entities.
Furthermore, fiscal management has focused on
fiscal prudence :

An oil stabilization fund is being used.

Rules for fiscal transfers to States and Municipalities
and for social programs are clearer.

A broader set of fiscal indicators which covers the
PSBR are being published.

Multi-year macroeconomic forecasts are included in
the budget.

Public sector related investment projects are being
authorized by Congress.
8
Index
1. Trends in Fiscal Policy in Mexico
2. Fiscal Institutions: What has been Achieved?
3. Fiscal Institutions: What is Pending?
9
The current improvements in fiscal management are
included in annual laws without the capacity to guide
future budgets.

There have been proposals
institutions in the last years.
to
improve
fiscal

The Fox Administration proposed a set of
budgetary reforms as a part of the tax reform in
2001.

The largest opposition party proposed its own set
of reforms in 2003.
Both proposals had the same objectives: to reduce
budgetary uncertainty, and to incorporate fiscal
responsibility.
10
The main points in both proposals were the following:
1.
To begin the budget discussion earlier in the year.
2.
To set rules for the Federal Government if the budget is
not approved.
3.
To set budget-amendment rules.
4.
To increase the budget’s macroeconomic and fiscal
planning horizon.
5.
To set fiscal responsibility principles to guide the
budgetary process.
6.
To reduce the discretionary powers for unreported
spending.
11
Timing of Budget Discussions.

Currently, the Executive has to send the budget
proposal to Congress by November 15th and December
15th on the first year of an incoming administration.


This represents an specially acute problem for
incoming presidents, who take office in December
1st.
The government has proposed to rearrange the
schedule as to have the budget proposal sent to
congress by October 15th, regardless of the year of the
administration.

The proposal requires the outgoing administration to
work with the incoming president on a budget
12
project.
Rules if the Budget is not Approved by Year’s End
The Federal Government’s proposal is to reduce the
risk of a disruptive shut-down.
Revenues Law
Is approved
Budget proposal
is rejected
Revenues Law
And Budget
Proposals
• Last year’s budget
mandatory expenses
are applied
•Last year’s tax
structure is applied
•Last year’s budget
mandatory expenses
are applied
Revenues Law
is rejected
Budget proposal
is rejected
•Net public
indebtedness can be
settled up to last13
year’s equivalent
Restrictions on the modifications that the legislative
can make on the proposed budget.

A Transparency principle whereby the Congress is
required to justify the benefits of the modifications.

When Congress proposes a greater amount of
expenses, it should also establish the source of the
resources to cover them, greater indebtedness being
not an option.

Congress could cover additional expenses through
two sources: greater revenues or reassignment of
expenditure proposed by the Executive.
14
Executive veto power over modifications made by
Congress. The veto could be overrode by a qualified
majority in Congress.
approval
veto
Vote on veto
5 days
3 days
B
u
d
g
e
t
Congress
modifications are
incorporated
i
s
accepts
Congress approves
with modifications
Executive
does not
accept
Veto is
overrode
Veto
Veto is
not
overrode
Executive’s
project
prevails
15
p
u
b
l
i
s
h
e
d
Fiscal Responsibility Principles:
1.
Multi-year fiscal targets should be provided with
estimates of revenues and expenditures.
2.
Multi-year effects of investment projects should be
taken into consideration.
3.
A multi-year concept of fiscal balance should be
considered in the Constitution.
4.
A fiscal deficit should be approved only if it is
temporary in multi-year fiscal forecasts.
5.
Automatic adjustment of expenditures in the event of
falling revenues should be considered until the
economy is capable of smoothing the cycles.
16
The reforms pending in Mexico would be conducive to
increased fiscal discipline:
1.
Constraints on fiscal deficits.
 Multi-year budgets with fiscal balancing criteria.
 Deficits approved should be temporary.
 Automatic expenditure stabilizers continue to
operate.
2.
Procedural rules which avoid excess spending.
 Amendments which imply higher spending must
specify a funding source.
 Veto power by the Executive.
3.
Transparency of the whole budgetary process.
 Orderly discussion of budgetary matters.
 Rules to avoid a government shut-down.
 Multi-year budgeting of large investment projects.
17