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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