1 FISCAL INSTITUTIONS IN MEXICO: WHAT REFORMS ARE PENDING? November, 2003

2 Index 1.Trends in Fiscal Policy in Mexico 2.Fiscal Institutions: What has been Achieved? 3.Fiscal Institutions: What is Pending?

3 Primary Expenditure and Fiscal Revenue (percentage of GDP) 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)

4 Net Public Sector Debt, 2002 (percentage of GDP) 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) Fuente: FMI.

5 Index 1.Trends in Fiscal Policy in Mexico 2.Fiscal Institutions: What has been Achieved? 3.Fiscal Institutions: What is Pending?

6 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)

7 The Mexican authorities have gradually been improving the fiscal process by incorporating the following into the annual laws:  Indebtedness ceilings: External and domestic debt ceiling for the Federal Government. External and domestic debt ceiling for the Federal Government. Limits on debt of States and other public entities. Limits on debt of States and other public entities.  Limitations on the use of revenue: Budgetary balance targets as a percentage of GDP for the Federal Government. Budgetary balance targets as a percentage of GDP for the Federal Government. Credit limits on development banks. Credit limits on development banks. Targets in the financial balance of PEMEX and IMSS. Targets in the financial balance of PEMEX and IMSS.  Budget management rules: Quarterly revenue calendars to adjust spending in a timely fashion. Quarterly revenue calendars to adjust spending in a timely fashion. Automatic spending mechanisms which reduce outlays if revenues decrease. Automatic spending mechanisms which reduce outlays if revenues decrease. Quarterly evaluation of the targets set to public entities. Quarterly evaluation of the targets set to public entities.

8 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.

9 Index 1.Trends in Fiscal Policy in Mexico 2.Fiscal Institutions: What has been Achieved? 3.Fiscal Institutions: What is Pending?

10 The current improvements in fiscal management are included in annual laws without the capacity to guide future budgets.  There have been proposals to improve fiscal institutions in the last years. The Fox Administration proposed a set of budgetary reforms as a part of the tax reform in The Fox Administration proposed a set of budgetary reforms as a part of the tax reform in The largest opposition party proposed its own set of reforms in The largest opposition party proposed its own set of reforms in Both proposals had the same objectives: to reduce budgetary uncertainty, and to incorporate fiscal responsibility.

11 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.

12 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. 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 project. The proposal requires the outgoing administration to work with the incoming president on a budget project.

13 Rules if the Budget is not Approved by Year’s End Revenues Law And Budget Proposals Revenues Law Is approved Revenues Law is rejected Budget proposal is rejected is rejected Budget proposal is rejected Last year’s budget mandatory expenses are applied Last year’s budget mandatory expenses are applied Last year’s tax structure is appliedLast year’s tax structure is applied Last year’s budget mandatory expenses are appliedLast year’s budget mandatory expenses are applied Net public indebtedness can be settled up to last year’s equivalentNet public indebtedness can be settled up to last year’s equivalent The Federal Government’s proposal is to reduce the risk of a disruptive shut-down.

14 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.

15 Executive veto power over modifications made by Congress. The veto could be overrode by a qualified majority in Congress. Congress approves with modifications Executive Veto Congress modifications are incorporated Executive’s project prevails accepts does not accept Veto is overrode Veto is not overrode approvalveto Vote on veto 3 days 5 days Budget Budget is is published publishedBudget Budget is is published published

16 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.

17 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.