Prepared by a team from the Fiscal Affairs Department, headed by G. Kopits, and including A. Bauer, J.P. Córdoba and J. Viñuela, during a visit to Mexico City on January 16 to 29, 2002. The team met with officials of the SHCP, SECODAM, Federal Audit Office, COFEMER, Budget Committee of the Chamber of Deputies, Center for Fiscal Studies, the Bank of Mexico, INEGI, PEMEX, CFE, BANOBRAS, NAFIN, IMSS and ISSSTE, and representatives of the private sector (CONCAMIN and COPARMEX). The staff team also met with the secretaries of finance of the state of Mexico and of the state of Morelos.
For purposes of this report, the adjective “fiscal” embraces the government finances in their entirety.
Constitution of the United Mexican States (January 31, 1917, as amended on September 13, 1999), the Organic Law on the Federal Public Administration (1976, as amended March 13, 2002) and the Federal Law on Parastatal Entities (1986, as amended January 4, 2001) and the regulations thereto.
A similar division of powers exists within each state.
Due to the importance of certain enterprises such as Petróleos Mexicanos (PEMEX) in government revenues and for purposes of budgetary control, the authorities have opted to include certain parastatal entities in the budget, taking advantage of a faculty recognized in the Federal Law of Budget, Accounting and Public Expenditure (1976).
While the authorities submit the information for the Government Finance Statistics (GFS), it is subject to considerable lags and data on subnational government finances are not readily available in Mexico.
Articles 73 and 117–121 of the Constitution.
Article 115 allows the municipalities to tax real property and to charge for the public services they provide, in accordance with rules issued by the states. Among their responsibilities are the provisions of public lighting; garbage collection, transfer, treatment, and final disposal; central and retail markets; cemeteries; urban planning; streets, parks, playgrounds, and equipment; public safety, police services, and transit.
Article 124 of the Constitution.
Articles 73 reserves for the federal government the right to levy charges on electricity, tobacco production and consumption, gasoline and other petroleum derivatives, alcohol, beer, and forestry exploitation.
The Fiscal Coordination Law (1979, as amended in December 31, 2000) establishes that the federal government must transfer funds to the states through the General-Revenue Sharing Fund, comprising 20 percent of shareable federal revenues, i.e. revenues from taxes and royalties on petroleum and mining operations (excluding additional and extraordinary royalties on petroleum exploitation): 45.17 percent of shared revenues are distributed among the states in proportion to their population, 45.17 percent in proportion to their share in the collection of federal taxes earmarked for the states (circulation permits and taxes on new vehicles and special taxes on the production and consumption of alcoholic beverages and tobacco), and 9.66 percent in inverse proportion to the amounts established under the previous two calculations.
The states’ own tax revenues represent approximately 9 percent of their total revenues. Apart from taxes earmarked for the states (see preceding footnote), the principal source of states’ own revenues is the payroll tax, but this tax is optional and not all states impose it. The Federal Revenue Law for fiscal year 2002 gave the states the power to impose limited taxes on individual incomes and on the sale of goods and services (Transitional Article 7, sections IX and X). Transfers from the PEF to subnational governments in 2002 amounted to about 7 percent of GDP.
States and municipalities receive two types of transfers from the federal government: the revenue-sharing transfer (participaciones), over which subnational governments have spending discretion, and the contributions (aportaciones), which are earmarked transfers for social services and infrastructure.
At least 20 percent of revenues received from the General Revenue-Sharing Fund must be transferred.
However, there is no education agreement with the Federal District.
The Constitution (Article 74) provides only that the legislature must examine, debate, and approve the budget; it makes no explicit mention of the power to amend the budget. This power is established in Article 22 of the Law on Budget, Accounting and Federal Public Expenditure (1979, as amended on December 21,1995) and allows the legislature to reduce the budget, amend its composition, and even increase the budgetary ceiling, provided it approves the funds to finance the additional expenditure. However, it is not clear whether those funds refer to additional tax revenue or other sources of financing.
Since only the Chamber of Deputies approves the budget (as opposed to both chambers), the budget is issued as a legislative decree and not as a law. The presidential veto power established in the Constitution refers to laws (approved by both chambers) and thus may or may not cover the budget decree. This legal vacuum has not been put to the test as no president has yet vetoed the budget decree.
Currently, Congress is considering several proposed constitutional reforms to correct this problem. The most recent draft was submitted by the government in April 2001. That draft also proposes amendments to other aspects of the budgetary process with a view to enhancing transparency, clarifying the distribution of powers between the two branches of the state and introducing fiscal responsibility principles. Congress has not yet considered this draft.
Bank of Mexico Law (1993, as amended on January 19, 1999).
These special circumstances are covered in the Bank of Mexico Law (Article 12) and refer to situations where the government’s cash account is insufficient to service the external debt. In these cases, the Bank of Mexico will meet the federal government’s obligations and issue securities in its name to recover the amounts advanced.
These are the Housing Operations and Bank Financing Fund (FOVI), the Special Farm Finance Fund (FIRA) and the Business Development Fund (FIDEC), which is now being dissolved. In addition, FOVI is being transformed into the National Mortgage Corporation (a development bank) that will consequently be subject to regulation by the National Banking and Securities Commission (CNBV), which will improve the disclosure of information on its operations.
The Bank of Mexico Law requires the bank to maintain to maturity the conditions on trust loans outstanding at the time the law was approved. It also authorizes the bank to renew them for a maximum term of 20 years from that date.
The government has however established a compensation mechanism whereby the enterprises must pay a fixed fee to the federal government for the use of its assets. The value of subsidies granted is deducted from this transfer: if the difference is negative, the enterprise absorbs the subsidy, and if it is positive it is capitalized.
Water supply falls to the municipalities, which are responsible for billing at rates approved by the local legislature. However, very little revenue is collected for this service. The federal government’s involvement is primarily limited to infrastructure.
The development banks are the National Public Works and Services Bank (BANOBRAS); National Foreign Trade Bank (BANCOMEXT); National Army, Air Force and Navy Bank (BANEJERCITO); National Farm Credit Bank (BANRURAL), with 12 subsidiaries; National Finance Corporation (NAFIN); National Sugar Financing Corporation (FINA), now being dissolved; and the National Mortgage Corporation, created in 2001.
The estimated capital deficit of the IPAB in September 2001 stood at 11 percent of GDP. A third of these obligations carry the explicit guarantee of the federal government and the remainder are guaranteed by the Congress, under the Bank Savings Protection Act (Article 45): “If the Institute should be unable to meet its obligations, the national Congress will issue the measures it deems appropriate to pay the guaranteed obligations and the financing referred to in the following article. This guarantee must be shown, in accordance with the applicable legislation, in the loan documents or other instruments substantiating those obligations.”
The estimate of public sector borrowing requirement (RFSP for its Spanish acronym) includes the increase in net assets of the development banks and the public financial trust funds. Nevertheless, no information is published on the nature of the programs of these entities, their noncommercial components nor their relationships with the government. Inclusion of the net assets of the development banks and the public financial trust funds has been viewed as a preventive measure, given the problem in separating the commercial and noncommercial activities of those institutions. Apart from the public financial trust funds there are more than 2000 unstructured trusts with their own capital, about whose operations no information or financial statement is published.
Essentially, the Economic Deregulation Unit of the Ministry of Economy and the Federal Regulatory Improvement Commission (COFEMER).
The Federal Tribunal of Fiscal and Administrative Justice is responsible for resolving disputes, including those relating to environmental and taxation issues, between individuals and the public administration.
The legal framework for fiscal management includes the Constitution, Fiscal Code of the Federation (1981, as amended on December 31, 2001), the Fiscal Coordination Law, the Law on Budget, Accounting and Federal Public Expenditure and its regulations, the General Public Debt Law (1976), the Federal Treasury Service Law (1985, as amended on May 29, 1998), the Federal Parastatal Entities Law (1986, as amended on January 4, 2001), the Planning Law (1983) and the LIF and the PEF Decree approved for the year, and the Manual of Budgetary Rules for the Federal Public Administration (available at www.shcp.sse.gob.mx).
Article 11 of the PEF for 2002.
The LIF for fiscal year 2002 established a sales tax on luxury goods (Transitional Article 8) and provided authorization for the states to establish taxes on income and goods and services (Transitional Article 7, Sections IX and X).
No precedent exists on this matter so far, as the LIF has always been approved in time, as mentioned in paragraph 6.
The LIF for 2002 (Article 28) obliges the SHCP and the SAT to post this information on their web pages within 24 hours after approval.
During 2001, taxpayers filed more than 100,000 appeals for revocation and 30,000 appeals for nullity.
For example, during 2001 some 1,400 SAT officials were dismissed for improper conduct. SECODAM reported that during 2001 a total of 9,601 public servants were found administratively responsible for improper conduct, with sanctions ranging from simple warnings to dismissal from public service.
See http://www.shcp.gob.mx/ieo/index.html. In addition, the SHCP issues a press release summarizing the major aspects of the quarterly report, on the day it is submitted to Congress.
That draft law requires federal government entities to disclose information on their functions: the objectives declared in their operating programs; personnel, compensation, and services offered; and procedures, requirements, and formats for access to them. It also requires the SHCP to publish fiscal information that is already public de facto, and to disclose the results of audit reports prepared by the SECODAM and the Federal Audit Office.
The so-called PIDIREGAS projects are included pursuant to the specific accounting rule explained in paragraph 23. The PIDIREGAS are capital investment projects that are being undertaken by the private sector on behalf of the public sector. Under the most common scheme, the private sector provides initial financing for the investment project during the construction period.
The trust funds refer to fiduciary accounts established with public funds, generally with development banks having specific mandates (e.g., promotion of loans to sugar mills, guaranteeing loans for public sector pension system participants, etc.).
The Law on Budget, Accounting and Federal Public Expenditure requires presentation in the PEF of information on the preliminary outturn of the previous fiscal year and an estimate for the current fiscal year (Article 19-IV).
However, the SHCP web page publishes the current budget classifier and its predecessor.
The PEF must also provide a summary of contingent liabilities of the states.
The law requires this report to include federal revenues foregone through exemptions and special treatment in federal taxation. The SHCP is to define, together with the respective committees of the Chamber of Deputies, the contents and definitions of that report, as well as its delivery date, by February 15, 2002.
See the quarterly Reports on the Economic Situation, Public Finance, and Public Debt (Informes sobre la Situación Económica, las Finanzas Públicas y la Deuda Pública) and Timely Statistics (Estadísticas Oportunas). These reports include the public debt of the budgetary public sector and the external debt of the development banks. However, they exclude liabilities of the IPAB, financial obligations flowing from PIDIREGAS projects, and other liabilities of public trusts and the development banks. These liabilities are summarized in the statistics for Historic Balances of Public Sector Financing Requirements, but no information is provided on their composition.
In addition, the SHCP web site publishes the composition of foreign debt by currency and forecasts of foreign debt service for the coming four years.
Specific accounting rules for PIDIREGAS projects are established in the General Public Debt Law. Article 18 of that law provides that “for purposes of this Law, only financing amounts payable during the current fiscal year and the following fiscal year are to be considered as direct liabilities, and the remaining financing will be considered as a contingent liability.” By law, therefore, information on the public debt includes only a portion of the total recognized obligations, which is not in line with international practice.
The internal regulations of the recently created Unit for Financial Coordination with the States give it the duty of fostering programs for fiscal transparency in the states and municipalities, and creating the National System of Fiscal Information. This system should serve to strengthen and standardize the state financial systems as far as possible.
It is not stated whether this commitment refers to the balance for the budgetary public sector or the RFSP.
The PEF for 2002 (volumes 4 and 6).
The PEF for 2002 provides that draft laws or decrees must include also an assessment of the impact on public expenditure to be taken into account if they become law. Congressional committees will also have to include an assessment of that impact in their reports.
The functions of these other branches include contributions to social security; wage and economic provisions; public debt; contributions to basic, normal, technical, and adult education systems; contributions to state and municipal entities; equity interests in state and municipal entities; debts from previous fiscal years (ADEFAS); expenditure on financial rationalization operations and programs; and expenditure on programs of support for savers and bank debtors.
The first volume contains the explanatory statement. The second offers, for each institution included in the autonomous, administrative and general branches, information on the programming strategy, an economic and financial programming summary, economic budget, and administrative summary of subsidies and transfers to deconcentrated agencies and parastatal enterprises. The third volume breaks down the budget by program and by expenditure object. The fourth volume presents the budgets for the agencies and enterprises under direct budgetary control, from seven perspectives. The fifth volume contains cash flows for entities under indirect budgetary control. The sixth volume presents investment plans, with a projection of financial needs to the year 2007.
The budget code in the PEF for 2002 consists of 15 components and 38 digits.
As noted earlier, this consists of the General Criteria for Economic Policy, the LIF and the PEF.
Included, for the first time, in the General Criteria for Economic Policy for 2002.
By February 28 of each year budgetary entities are legally bound to submit to the SHCP, a statement of all recognized obligations pending payment. The account is kept open until March 31 for making payments against recognized obligations from the preceding year, provided they meet certain requirements in Article 45 of the Regulations to the Law on Budget, Accounting and Federal Public Expenditure.
The internal control organs are administratively integrated into the entities in which they are located; employees are paid by the entities where they are located, although they are organizationally and functionally under the SECODAM. SECODAM regulates, programs, coordinates and supervises their activities and appoints management level officials: the controller and the heads of the control and evaluation, audit, and complaints units.
Managerial positions are defined in the Federal Law on Government Employees (Article 5).
Responsibility for human resource management is assigned to the SHCP and the SECODAM, depending on whether the proposed measures have a budgetary impact. In recent years, the signing of performance appraisal agreements with the dependencies seems to have relaxed the strict internal controls over expansion of the payroll, changes in status for employees, and amendments to compensation. This has occurred thanks to a program called “computerized human resources management information system” (SIARH), which has streamlined the required authorizations in the personnel field.
The Law on Procurement, Leasing and Services in the Public Sector (January 9, 2000) and Regulations thereunder (August 20, 2001); and Law on Public Works and Related Services (January 4, 2000) and Regulations thereunder (August 20, 2001).
See Article 30 of the Federal Revenue Law for details on the information that must be submitted to Congress.
Nevertheless, it must be noted that institutional coverage of the PEF is limited (see paragraph 2).
The Federal Audit Office was created at the end of 2000 by the Federal Audit Law, replacing the Senior Comptroller of Finance. Matters that were in process within the Comptroller’s Office at the time the new law came into effect continue to be handled by the Federal Auditor under the terms of the Organic Law of the Superior Financial Accounting Office. However, given its recent creation, it is still too early to assess the effectiveness of the Federal Audit Office.
The Federal Audit Law establishes the principle of coordination between the Federal Audit Office and the state legislatures and the Legislative Assembly of the Federal District, which has been confirmed in the signing of coordination agreements (to date there are 13 such agreements). Coordination is necessary, since there is duplication of supervisory powers with the state auditors.
The first audit report on the public accounts by the Federal Audit Office (for the year 2001) will be issued no later than March 31, 2003.
The INEGI is a deconcentrated body of the SHCP and therefore does not have technical autonomy. Nevertheless, the current government has made it a strategic goal of its administration to give autonomy to the INEGI.
Methodological information on compiling the national accounts for general government is available at the INEGI website (www.inegi.gob.mx).
For example, the budgetary information as currently presented offers neither the benefit of a database that expert users can process nor the simplicity that would meet the needs of users seeking more aggregated information.
The National Development Plan for 2001–06 contains an explicit statement of the objectives of transparency and responsibility: “Discretionary decisions must be reduced to a minimum and must respect and be governed by clear public standards, so as to avoid opportunities for corruption and to allow the citizens to appreciate the honesty and honorability of public servants, as well as to detect any discrepancies in the conduct of public duties.” The Decision of February 28, 2001, establishes the Provisions for Productivity, Economy, Transparency and Budgetary Deregulation in the Federal Public Administration.
The Regulatory Reform Program for 2001–06 and the National Program to Combat Corruption and Foster Transparency and Administrative Development for 2001–06 (promulgated on April 12, 2001) establish guidelines for the Federal Regulatory Reform Commission and SECODAM, respectively, in the context of the National Development Plan for 2001–06.
Of course, all parastatal entities devoted to public functions (for example, IMSS) would still be included in government. At the same time, for the sake of simplicity, thought could be given to merging deconcentrated entities and some of the noncommercial decentralized entities within the accounts of their respective ministries.
On this point, the PEF should also include financial statements for the parastatal entities under indirect budgetary control and for the unstructured trusts that engage in noncommercial activities.
This broad coverage of public debt approximates that of the cumulative historical balances of public sector borrowing requirement shown in the Timely Public Finance Statistics. Nevertheless, only the central government’s debt is shown in comparison with other OECD countries, in the Reports on the Economic Situation, Public Finances and Public Debt.
The authorities could stress the programs now underway to standardize the accounting practices of the states with those of the federal government, and to strengthen their budget execution information and monitoring systems.
As a minimum, the PEF documentation should include original and revised estimates for the main budgetary aggregates for the two preceding years, as well as forecasts for the most important budgetary aggregates for the coming two years.
In cases where the framework extends beyond the six-year term of government, it would be based on trend projections, i.e., without new policy measures. This would make it possible to set ex ante fiscal goals in quantitative terms, and to show the profile and nature of the government’s planned adjustments. In addition, it would provide the basis for ex post evaluation of fiscal performance.
The constitutional reform (Article 126) proposed in April 2001 contains rules relating to the fiscal balance and public indebtedness that, without the necessary institutional infrastructure in place, could lend themselves to creative accounting and noncompliance.
While it is relatively easy to estimate the cost of some governmental operations of the parastatal entities (for example, the financial cost of banking rationalization assumed by IPAB), it is rather more difficult to measure the subsidy element that may be contained in ostensibly commercial operations (for example, the granting of loans by the development banks). In some cases, such operations may include cross-subsidies that have no impact on the public deficit.
It is important to distinguish between guarantees that give rise to a definite government obligation, in effect representing real liabilities even if they are not recognized as such, and those that may but will not necessarily result in a government obligation and are thus considered contingent liabilities.
These medium- and long-term projections should be disclosed with information on the methodology and the demographic and macroeconomic assumptions supporting them. Present value calculations should also indicate the discount rate used.