Scope of Government

2. The structure and functions of government are clearly defined in the Constitution and in legislation,³ but the distinction for fiscal purposes between the government sector and the rest of the public sector is not entirely consistent with international standards. Mexico is a federal republic consisting of the federal government, the federal district, and 31 federative entities (i.e., states) that establish the legal basis for statutes issued by the 2,377 municipalities. Supreme power within the federation lies with the legislative, executive and judicial branches.⁴ The federal executive branch is headed by the President of the Republic, and consists of the central administration and the parastatal administration. In turn, the central administration is comprised of 18 state secretariats (i.e., ministries, including deconcentrated bodies), the administrative departments, and the judicial council. The parastatal administration consists of decentralized agencies, enterprises in which the government has a majority interest, including nonfinancial public enterprises and financial public institutions and trusts, and entities or funds engaged primarily in commercial activities (Figure 1). The formulation and implementation of public policy is essentially the responsibility of the federal government, the state governments, and to a lesser extent the municipalities. Nevertheless, the inclusion in the Federal Expenditure Budget (PEF) (encompassing the “budgetary public sector”) of the budgets for some major public (“directly controlled”) enterprises, prevents a clear distinction between the noncommercial activities of the federal government and the strictly commercial activities of the rest of the public sector.⁵ Moreover, the fact that the definitions of the government sector used for budgetary and statistical purposes are not consistent with international criteria makes it difficult to compare Mexico’s government finances with those of other countries.⁶

Structure of the Public Sector

Citation: IMF Staff Country Reports 2002, 200; 10.5089/9781451825558.002.A001

1/ IPAB is an autonomous deposit insurance agency. It is also responsible for the administration of bank restructuring and debtor-support programs on behalf of the Federal Government.

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Structure of the Public Sector

Citation: IMF Staff Country Reports 2002, 200; 10.5089/9781451825558.002.A001

1/ IPAB is an autonomous deposit insurance agency. It is also responsible for the administration of bank restructuring and debtor-support programs on behalf of the Federal Government.

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• Download figure as PowerPoint slide

Structure of the Public Sector

Citation: IMF Staff Country Reports 2002, 200; 10.5089/9781451825558.002.A001

1/ IPAB is an autonomous deposit insurance agency. It is also responsible for the administration of bank restructuring and debtor-support programs on behalf of the Federal Government.

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3. Law defines the division of fiscal responsibilities among the levels of government. The Constitution contains a list of areas where regulation falls exclusively to the National Congress, and another list over which the states have no jurisdiction.⁷ It also defines clearly the powers and responsibilities of the municipalities with respect to taxation and expenditure.⁸ A residual clause explicitly assigns to the states those functions not reserved by the Constitution to the federal government or the municipalities.⁹ In this distribution of powers there is no mention of where responsibility lies for executing the functions that are regulated by Congress. In practice, this legislative gap with respect to public spending has not generated any jurisdictional disputes, and has been filled by negotiated agreements. With respect to revenues, the Constitution reserves for the federal government the sole authority to tax international trade, to use and exploit natural resources, and to impose special taxes on certain goods and services.¹⁰ Nevertheless, by virtue of the Fiscal Coordination Law,¹¹ the states have transferred their taxing powers to the federal government in return for a share of federal revenues.¹²

4. The federal government has no direct control over the states’ finances. However, the Constitution¹³ prohibits the states and municipalities, including their decentralized agencies and public enterprises, from borrowing abroad. They may borrow domestically up to the ceilings set by their respective legislatures for productive public investment. Some states (for example, Tlaxcala) prohibit any type of borrowing.

5. Transparent and nondiscretionary criteria determine the distribution of federal funds to the states through revenue-sharing arrangements and transfers.¹⁴ A formula automatically establishes state shares in federal revenues. The states, in turn, are required to transfer a proportion of the funds they receive from the federal government to their municipalities. Nevertheless, only some states have clear and properly publicized formulas for distributing revenue-sharing receipts among their municipalities.¹⁵ Generally speaking, the federal government does not have adequate information to verify the use of revenue-sharing funds or to validate the amounts to be transferred to the municipalities. In addition, there are federal contributions specifically earmarked for seven budgetary funds (basic education, health services, social infrastructure, social assistance, municipal strengthening, technical education, and public safety). To access funds for basic education and health services, the states sign contracts with the federal government that define clearly the expenditure responsibilities of each level of government.¹⁶ The remaining revenues are allocated in accordance with the operating rules of each of the funds.

6. The distribution of budget responsibilities between the executive and legislative branches is generally well established, but there is scope for further clarification. The budget is approved in two successive stages. First, Congress approves the Federal Revenue Law (LIF) and thereafter the Chamber of Deputies approves the PEF legislative decree. Although responsibilities for preparing and approving the budget are clearly defined, some ambiguities remain with respect to the legislature’s powers to amend the draft PEF submitted by the executive.¹⁷ On the other hand, the fact that the PEF is approved by legislative decree, and not by law, creates doubt as to the extent of the President’s constitutional veto powers.¹⁸ In addition, the time limit for legislative debate and approval (from November 15 to December 15) appears inadequate for a proper and complete review of government plans and programs. The short time available for approving the budget, and the fact that the Constitution says nothing about the status of fiscal policy in cases where the PEF or the LIF are not approved within the established time limit, generate great uncertainty about whether the government could be paralyzed if no agreement is reached with the legislature. This situation has never arisen, but could if political power in the Chamber of Deputies were severely fragmented.¹⁹

7. The budget and off-budget activities of the federal government are subject to centralized and clearly regulated coordination and management mechanisms. The Ministry of Finance and Public Credit (SHCP) coordinates formulation of the current and capital budgets and exerts control over the execution of all fiscal activities. The Federal Law on Budget, Accounting and Public Expenditure and its rules of application give the ministry broad powers to issue standards and set overall ceilings on expenditure (which entities of the centralized public administration and the parastatal public administration must respect in formulating their budget proposals), to approve guidelines and mandatory timetables limiting payments during budget execution, and to authorize amendments to the budget within the limits established by law. Approval by the Chamber of Deputies is limited to the PEF, which covers the budgets of the constitutionally autonomous entities, those of dependencies of the centralized public administration, and those of the entities under direct budgetary control, as well as transfers to the remaining entities of the parastatal public administration or entities under indirect budgetary control. Draft budgets for entities under indirect budgetary control are approved by their coordinating ministries and the SHCP. The Chamber of Deputies receives a forecast of cash flows from each of those bodies, for information purposes only.

8. The Bank of Mexico has full autonomy in the conduct of monetary policy. The relations between the bank and the government are clearly defined by law.²⁰ The bank provides cash management services to the federal government (for which it charges a commission), manages the government’s treasury account (and remunerates its cash holdings at market rates), acts as fiscal agent for the management of the public debt, and also serves as financial adviser to the government. In special circumstances, the bank may extend credit to the federal government up to the equivalent of 1.5 percent of expenditures authorized in the PEF, for a maximum term of three months.²¹ The bank also administers the three public trust funds to which it has made loans in the past.²² The financing terms on those loans affect the bank’s statements of earnings, but such information is not clearly identified in those statements.²³ The federal government discloses general information about financial transactions involving those trust funds, but it does not publish their financial statements.

9. The Constitution reserves certain strategic areas exclusively to the public sector. These are the post, telegraph and radiotelegraph, petroleum and other hydrocarbons, basic petrochemicals, radioactive minerals and nuclear power generation, and electricity. It also allows the federal government to participate, on its own account or together with the social and private sectors, in priority areas of development: railways and satellite communications. During the last two decades, the government has privatized or liquidated a number of public enterprises, reducing their number from more than 1,100 in 1982 to slightly over 200 today. The federal government may take an equity interest in private firms, either directly or through the development banking system. As of end-2001, public sector minority participation in private corporations was small and there are plans to sell such participation in the future.

10. The relationship between the federal government and public nonfinancial enterprises is clearly regulated and the enterprises must report their activities and their earnings statements to the SHCP. Some of these public nonfinancial enterprises engage in significant quasi-fiscal activities. For example the Federal Energy Commission (CFE) and Central Light and Power (LFC) subsidize electricity for residential and farm consumption on behalf of the federal government. In the Explanatory Statement to the PEF, these firms provide an estimate for the value of the subsidies by type of user (estimated at 0.7 percent of GDP for 2002). The CFE and the LFC, however, receive no transfers from the federal government, and the PEF does not explicitly record gross flows between the government and the public enterprises on this score.²⁴ To keep the public better informed, household electricity consumption bills began to identify the amount of the subsidy in 2001. There are also implicit subsidies for water consumption, but no information is published on their amount or their distribution by type of user.²⁵

11. The development banks, which represent about 30 percent of the total portfolio of the banking system, conduct certain quasi-fiscal operations.²⁶ These operations help explain the development banks’ persistent losses, and also the recurrent need in the past for the federal government to capitalize them. Quasi-fiscal operations consist primarily in the provision of services on behalf of the federal government, such as foreign trade promotion and technical assistance for small- and medium-scale enterprises, and in some cases the granting of loans at below-market interest rates. The financial statements of the development banks are published after auditing by the National Banking and Securities Commission (CNBV), but without identifying noncommercial activities on behalf of the government, nor do the banks receive transfers from the PEF at a level that would fully compensate them for such activities. Government programs for bank debt restructuring and portfolio purchases, administered by the Bank Savings Protection Institute (IPAB), are well documented in its reports and financial statements. The IPAB receives budgetary transfers sufficient to cover the entire cost of the debtor programs and a portion of the savings programs, but costs not explicitly covered by the federal government²⁷ must be absorbed in its own financial statements. There are also six financial trust funds that administer public resources, provide financial services, give guarantees, and make loans; very little information is disclosed on these trust funds, and no financial statements are published for them.²⁸

12. Transparency in the regulation of the private sector has been greatly enhanced. Rules and procedures have become more streamlined, and procedures for reviewing existing regulations and approving new ones have been made public. In particular, the following improvements are now in place: a requirement to call for prior comments, rules for conducting public consultations, regulatory impact estimates, a start at coordination with subnational levels of government, and the creation of specific institutions for coordinating regulatory reform.²⁹ Although these improvements are only partially reflected in social, environmental, and tax regulations, in the latter two areas procedures have been eliminated and simplified.³⁰ On the other hand, the consultation process is still a concession and not a right with respect to regulated entities. Mexico is far advanced in facilitating public access through the Internet to existing regulations and to new proposals.

Legal framework for fiscal management

13. The legal and administrative framework for fiscal management is comprehensive and public.³¹ The Law on Budget, Accounting and Federal Public Expenditure, its Regulations and the Manual of Budgetary Rules, which are available to the public, contain detailed rules on the processes of formulating, executing, and monitoring the PEF. The budgetary system reflected in these rules is highly centralized in the SHCP, which maintains strict control over the entire process for reasons of budgetary discipline. However, progress in setting objectives and evaluating the entities covered by the budget has not been accompanied by increased management autonomy. In addition, an excess of authorizations and supervision makes the process still too complicated. Despite recent efforts to devolve to individual entities the responsibility for disaggregating and amending their budgets, the SHCP maintains the power to review those amendments.³²

14. Federal, state, and municipal taxes are based on explicit legislation though some uncertainties remain. The Fiscal Code of the Federation regulates overall aspects of federal taxation. The specific provisions of each tax are approved through individual laws, although in some cases taxes have been approved and rules issued through the LIF.³³ This practice can create instability in the tax regime, since the LIF applies only for one fiscal year. Moreover, legal experts disagree on whether federal taxes could be collected at all if the LIF were not approved in time for the new fiscal year.³⁴ This legal vacuum would be removed by the budget-related constitutional amendments now under consideration in Congress.

15. Tax legislation is public and information readily accessible, but some tax laws are complicated by the many exemptions and special treatments. Federal and state tax legislation is public. The Tax Administration Service (SAT) publishes the texts of federal tax laws on the Internet, together with regulations, administrative provisions, and explanatory material.³⁵ Administrative provisions of a general nature applicable to federal taxes and duties are issued each year through a miscellaneous fiscal resolution in the Official Gazette. Certain internal provisions of the SAT, however, are not publicly available, such as responses to individual consultations that constitute jurisprudence. The simplicity of the laws governing the income tax and VAT suffers from the existence of too many exemptions and sectoral preferences—provided in addition to other fiscal benefits (see also paragraph 22). Moreover, on some occasions the legal drafting by Congress and regulatory drafting by the tax administration lack sufficient clarity.

16. Taxpayers’ rights and the system of tax dispute settlement are clearly defined by law. The Fiscal Code of the Federation establishes taxpayers’ rights and obligations and the system of penalties. Decisions of the tax administration may be appealed via two routes: (1) an appeal for revocation to the administrative authority that issued the resolution (this recourse is optional), or (2) an appeal for nullity before the Federal Tribunal of Fiscal and Administrative Justice. Decisions of the Federal Tribunal of Fiscal and Administrative Justice may be appealed by the taxpayer by bringing a claim for amparo (constitutional protection), and by the administrative authority through an appeal for review, which will be decided by the Circuit Collegiate Court. The duration of these procedures varies depending on the route of appeal that is chosen. If all instances of appeal are used, an appeals procedure may last up to 8 months.³⁶

17. Principles of ethical conduct for public officials are stipulated by law and in specific codes, and enforcement is improving. The Constitution (Articles 108–114) and the Federal Law on the Administrative Responsibilities of Public Servants (2001) establish administrative responsibilities and ethical standards for public officials. These standards require that public officials exercise their duties with impartiality, efficiency, and full respect for the law. The Administrative Control and Development Ministry (SECODAM) is the agency in charge of enforcing adherence to these standards. In addition, some agencies, including the SAT and the Federal Audit Office (Auditoría Superior de la Federación), have specific ethical codes and compliance is improving.³⁷

Commitments with respect to the publication of information

18. Mexico regularly publishes a considerable volume of fiscal information. The government must provide Congress with monthly and quarterly reports on the economic situation and the performance of government finances and debt (see paragraph 38). These reports are normally made available to the public on the same day over the SHCP’s Internet page.³⁸ In addition, each quarter the SHCP publishes the Timely Public Finance and Debt Statistics (Estadísticas Oportunas de Finanzas Públicas y Deuda Pública), containing monthly and quarterly information on financial requirements, revenues, expenditures, flows of funds, and debt of the budgetary public sector.

19. The calendar for publication of fiscal information is consistent with the Special Data Dissemination Standards (SDDS).³⁹ Although in practice a great deal of fiscal information is made public, the legal obligation to publish such information is still limited (essentially to the LIF, PEF, and the Public Account). If approved, the draft federal law on transparency and access to information presently under legislative consideration could result in significant progress in this regard.⁴⁰

Full information on fiscal activity

20. There is information on most federal government activities. The PEF contains the budgets of the constitutionally autonomous entities, the central administration, the social security institutions, and the decentralized agencies under direct budgetary control.⁴¹ For the parastatal entities under indirect budgetary control, some of which engage in noncommercial activities, the PEF includes only transfers from the federal government and, for information purposes, their projected cash flows. Neither the PEF nor the periodic fiscal reports provide any information on the financial statements of the more than 2,000 public trust funds, which are relatively less important.⁴² The quarterly reports provide operating balances of the Trust Fund for Rehabilitation of Concessioned Toll Roads (FARAC), which is empowered to issue debt, and on the outstanding debt of the financial trust funds.

21. The budget document includes only limited information on past fiscal performance, and no budgetary forecasts for future years. The explanatory statement to the PEF contains only estimates on budgetary performance for the current year. The executive branch does not provide original or revised budgetary estimates for previous years, making it difficult to compare recent budgetary performance against the proposed budget.⁴³ There is no description or explanation of changes from one year to the next in the classification or presentation of budgetary items; the only multiyear forecasts in the budget refer to investment projects.⁴⁴

22. There is no systematic and publicly available registry of the federal government’s contingent liabilities or of the quasi-fiscal activities of nonfinancial and financial parastatal entities. The PEF provides little information on quasi-fiscal activities and contingent liabilities. While the budget documentation provides some information on subsidies in the electricity sector, no attempt is made to quantify quasi-fiscal activities by the development banks and other parastatal entities (see paragraph 9). Nor does the PEF provide any analysis or integrated statistics on the federal government’s contingent liabilities, for example, the labor liabilities accruing in the pension and health insurance systems of the federal government and the parastatal entities.⁴⁵ Such information is important in securing a complete picture of the federal government’s fiscal exposure. The LIF for fiscal year 2002 (Article 31) for the first time required the SHCP to prepare and report on tax expenditures.⁴⁶

23. The federal government publishes information on all components of its outstanding liabilities, but the fragmentary manner of presentation makes analysis difficult. None of the public reports contains the composition of public indebtedness in a consolidated form. Nevertheless, information on indebtedness of the budgetary public sector is provided, and separately, on the principal components of the public debt that are excluded from that definition.⁴⁷ The published information on the indebtedness of the budgetary public sector provides an adequate level of detail and meets the guidelines of the SDDS. Information is offered on the composition of debt by term, type of creditor, and instrument, for both the external debt and the domestic debt. The quarterly reports also provide information on new debt issues during the year, and a forecast of maturities for the coming two years.⁴⁸ They also include information on the value of the federal government’s financial assets and on the debt that it has guaranteed. A balance is provided for the financial obligations excluded from the definition of the budgetary public sector (such as those for PIDIREGAS projects⁴⁹ and the trust funds), but with no breakdown by term or type of instrument.

24. Limited fiscal information is available on the subnational levels of government. The states and municipalities publish their revenue and expenditure budgets and their public accounts in the official state Gazettes. This information is available only with a significant time lag, however, and there is no standardized presentation. The SHCP does not publish aggregate information on revenues, expenditures, and fiscal balances of the subnational and national governments on a consolidated basis. Published information is limited to timely record on the stock of state and municipal liabilities.⁵⁰ The National Institute of Statistics, Geography and Computerized Information (INEGI) compiles and publishes information on the activity of subnational levels for purposes of preparing the national accounts, but only with a delay of more than one year.⁵¹ However, broadly speaking, a number of states have made progress toward greater transparency, as illustrated by the states of Mexico and Morelos (Boxes 1 and 2).

Budget documentation

25. The budget document provides information on sectoral priorities, but not on the medium-term objectives and sustainability of fiscal policy. Legally, the sectoral objectives in the PEF must match the medium-term strategy defined for the public sector in the national development plan. In November of each year, the authorities prepare for Congress a document entitled General Criteria of Economic Policy, which accompanies the LIF proposal and the draft PEF, and which quantifies the objectives of fiscal policy in terms of revenues, expenditures, deficit, and debt for the coming fiscal year. The General Criteria for the year 2002 set forth the qualitative goal of achieving budgetary balance over the medium term.⁵² The explanatory statement to the draft PEF subsequently includes annual fiscal targets. The National Development Finance Program (PRONAFIDE) summarizes the targets for the budget and stock of debt of the federal nonfinancial public sector for the six-year legislative term, but those objectives remain fixed throughout the period and are not revised to reflect actual financial performance. Furthermore, no medium- or long-term projections for the public pension system are publicly available.

26. Each year automatic mechanisms are established for adjusting expenditure when actual revenue differs from the budgetary forecast, but no permanent fiscal rules have been adopted—apart from the prohibition on external borrowing and limits on domestic borrowing by states, as mentioned. The PEF regulates the use of revenue surpluses over LIF estimates (increased expenditure or debt reduction) and determines what adjustments may be made in expenditures to maintain the programmed budgetary deficit when, on the other hand, actual revenue falls below the programmed level.

27. The annual budget is prepared within a comprehensive and coherent macroeconomic framework, but it is not integrated into a medium-term expenditure framework. The macroeconomic framework for the budget is published in the General Criteria for Economic Policy, but the information is limited to aggregates, without specifying in any detail the assumptions and procedures used in preparing the macroeconomic forecasts. Nor is there any explanation of the methods used for forecasting revenues and expenditures. As mentioned, the only multiyear disaggregated information included in the budget documentation refers to capital projects.⁵³

28. The budget document does not differentiate sufficiently between existing policies and new policies, nor does it provide an analysis of fiscal risks. Changes in tax policy are summarized partly in the regulatory laws for the various taxes and partly in the LIF. Similarly, the program analyses in the PEF do not explain new policies and their estimated fiscal effects⁵⁴ clearly and systematically. There is no analysis of the sensitivity of fiscal aggregates to changes in economic parameters and other uncertainties (such as pending lawsuits and their estimated value) nor, as noted earlier, on the principal contingent liabilities such as labor benefits.

Budget presentation

29. Budget and off-budget data are presented on a gross basis and classified by institution, function, program, and economic category. The institutional classification divides expenditure into budgetary branches, which include autonomous branches (Legislature, Judiciary, Federal Elections Institute and National Human Rights Commission), administrative branches (Office of the President and 18 secretariats), general branches⁵⁵ and entities under direct budgetary control. For each institution, expenditure is classified by program, specifying the function and subfunction for each program, and within each program expenditure is classified by institutional activity, responsible unit, project, and economic category. The functional and economic classification systems used are compatible with existing international classifications, but no attempt is made to present the data consistently with international practice.

30. The budget document provides basic budget information that is comprehensive, but not very clear. The PEF consists of six volumes of useful information for the analysis of public expenditure.⁵⁶ Nevertheless, the excessively complex budget coding⁵⁷ and organizational format make the information difficult to understand. In order to understand the budget and to verify its accuracy, the user must have clearly presented as well as complete information.

31. The budget document presents a statement of objectives for the principal budget programs. For each institution, the PEF describes the objectives of each program and the practices for each institutional activity, as well as defining program elements (number and formula of the indicator, universe of coverage, and objective). Yet the authorities recognize that, despite significant progress, the definitions of these elements still suffer from severe limitations in terms of evaluating performance, and they are now under revision.

32. The officially recorded budget balance is a poor indicator of the general government fiscal balance. On one hand, the budget documentation⁵⁸ contains no information on subnational finances. On the other hand, the budget balance shown in the PEF is not consistent with recommended international practice, because of its institutional coverage. It does not coincide with the central government budget balance, because it includes decentralized agencies engaged in commercial activities, and it excludes others with noncommercial activities. Nor does it coincide with the balance for the nonfinancial public sector, because it does not include all majority-owned nonfinancial enterprises. Finally, the recording of certain transactions (PIDIREGAS projects, interest, etc.) deviates from generally accepted accounting standards. This has led the authorities to establish as a new indicator the public sector borrowing requirement (RFSP),⁵⁹ which, while suffering from the aggregation limitations noted above, provides a more reliable picture of the overall fiscal balance.

Budget execution procedures

33. The accounting system used by the autonomous entities and the decentralized public administration does not provide reliable and timely information on accrued expenditures and accounts payable. Currently, Mexico uses a modified cash-based accounting system.⁶⁰ That system is not able to provide timely and reliable information on the different stages of the expenditure process. Although required by law, commitments are not recorded and accrued obligations are recorded at the same time as the payment orders. Furthermore, the treasury does not make all third-party payments directly, but transfers a portion of the funds to executing units, thereby converting them into independent treasuries. Finally, the current accounting system has four subsystems (outflows, inflows, cash, and public credit). Each subsystem operates independently, using semi-automated processes, making it difficult to integrate information and to consolidate and reconcile the data. An integrated system for federal financial management (SIAFF) has been designed and is now being applied: this will provide support for the timely recording of all stages of the expenditure process and will produce fiscal data in real time. Following an experimental introduction in two ministries during 2002, the system is expected to enter into general use in January 2003.

34. Internal control systems function reasonably well; they are being redesigned to make them more effective and reduce excessive bureaucracy. Internal control functions are divided by law between the SHCP and the Ministry of Administrative Control and Development (SECODAM). The SHCP exerts its control function by approving mandatory execution calendars for the expenditure budget and by making payments to the budgetary entities. It also approves or authorizes budgetary adjustments and prepares regular reports on budgetary execution on the basis of information that the budgetary entities are required to report within predetermined time limits. SECODAM is responsible for administrative and accounting control and internal auditing, functions that it performs directly through 216 internal control units located in entities of the federal public administration, both centralized and parastatal.⁶¹ As part of the reform process now underway, SECODAM has assigned top priority to reinforcing its control and management evaluation systems, over which it has exclusive responsibility. On budgetary matters, it focuses on controlling public procurement and contracting, performing financial and compliance audits and contracting for external audits of all parastatal entities. Currently, the audit results are not published. Although mechanisms exist for following up its recommendations, there are no provisions for dealing with audited units that fail to comply with those recommendations.

35. Civil service regulation is not uniform. Although recent years have seen considerable progress in rationalizing public servants’ pay and making the system more transparent, there is still room for improvement. Public employment is mainly regulated by the Federal Law on Government Workers (1963, as amended on January 23, 1998), on the basis of the Constitution (Article 123, section B), and complementarily by the Federal Labor Code. Except for certain careers subject to specific regulations, all public employees are legally classified according to whether they occupy staff positions or managerial positions.⁶² These two types of positions are subject to different recruitment, promotion, and layoff procedures. Generally, job vacancies receive little publicity, and the selection process involves a great deal of discretion, especially for middle-level and senior management positions.⁶³ The fairness and transparency of the remuneration system have improved substantially with the publication of the Salary Description and Evaluation System in the Services Manual, which has laid the foundation for introducing a merit- and responsibility-based pay system, and has reduced pay discrepancies among similar jobs in different entities. The PEF decree includes the pay schedule for public officials. Less progress has been made in implementing the system for evaluating performance and the related system of incentives.

36. Regulations governing procurement are clear and complete; bidding and contracting systems are transparent. Regulations governing public purchases⁶⁴ call for three systems of procurement, depending on the size of the contract or on special circumstances: public bidding, which is the general procedure; two special procedures, involving awards on the basis of three proposals; and direct purchase. The regulations apply to all entities of the federal public administration, except for the legislative and judicial branches, constitutionally autonomous bodies, and transactions between federal and state dependencies and entities. Calls for tender, bidding documents, and awards are made public under all systems. Supervisory and standard-setting responsibilities in this area lie with SECODAM, which has developed an Electronic Public Procurement System (COMPRANET) for publishing all phases, procedures, and forms related to the procurement process.

37. The federal tax administration reports regularly on its activities but does not have statutory protection against political interference and dismissals. The SHCP sends quarterly, published reports to the Chamber of Deputies with details on tax collection, revenues resulting from tax audits (and expenditures made in this area), proceeds of fines and legal enforcement, the taxpayers’ roll, and other matters.⁶⁵ There is no professional career stream for public servants in the federal tax administration. Senior managers of the SAT are appointed by the president, and confirmed by the Senate.

Obligation to provide fiscal information

38. The executive branch has a legal obligation to submit regular reports to Congress on budget execution. The PEF law (Articles 73.1 and 74) requires the SHCP to submit a quarterly report to Congress on the economic situation, government finances, and public debt, within 35 calendar days after the end of each quarter, and it sets out the required contents. As noted earlier, the published reports provide detailed information on revenue and expenditure budget execution. The reports provide comparisons, in the first case, with planned revenue schedules and, in the second case, with the results from the same quarter of the previous year, and with initial and amended budgets. They also provide information on the evolution and situation of the internal and external public debt, and on physical execution of the capital budget. The SHCP must also provide monthly information to Congress on revenue collection and on the federal government debt, no later than 35 days after the end of each month.

39. Audited public accounts are submitted to Congress during the following fiscal year. The executive branch is required to submit the Public Account to Congress before June 5 of the following year, and the Federal Audit Office must complete the Report on the Review and Audit of the Federal Government’s Public Account before March 31 of the year following the fiscal year to which the accounts refer. This report contains detailed execution information on the revenue and expenditure budgets, and an explicit comparison of results against the initial and amended figures; an explanation of results from the major expenditure policies; the consolidated financial statements for the various branches included in the PEF; and information on the debt of the budgetary public sector. As of 2001 there is an obligation to provide a midyear status report on the Public Accounts, pursuant to Articles 8, 9, 10 and 11 of the Federal Audit Law (2000). This report is submitted to Congress in August.

40. Information on the results of budgetary programs must be provided to Congress. The PEF law (Article 63) requires dependencies and entities, through their sectoral coordinator, to submit a quarterly report to Congress on their compliance with goals and objectives, based on specific indicators, within 15 working days after the end of each quarter.

Data quality standards

41. Budgetary data provide a reasonably reliable indication of actual results.⁶⁶ Supplementary appropriations during the year are held to prudent levels, with most deviations occurring in entities under direct control. Budget execution is also substantially in line with approved budgetary figures.

42. Public accounts summarize the main accounting principles for preparing the financial statements. However, the actual accounting principles and manuals for the central public administration and for the parastatal entities are not publicly available.

43. Data from the public accounts can be reconciled with budgetary and monetary data. Nevertheless, limitations to the accounting system and the lack of sufficient background information make such reconciliations difficult to perform routinely or in any detail during the year.

Independent scrutiny

44. The recently created Federal Audit Office (Auditoría Superior de la Federación) has the autonomy and resources to exert external supervision over the federal executive branch.⁶⁷ The Audit Office reports to the Chamber of Deputies, but has full technical and managerial autonomy and broad powers to conduct subsequent financial and performance audits over all federal branches, the federal public entities, the states, municipalities, and individuals.⁶⁸ It audits the public accounts of the executive branch and reports its findings to the Chamber of Deputies by March 31 of the subsequent year.⁶⁹ It also publishes these audit reports, but only after submitting them to the Chamber of Deputies. The Federal Audit Office has the authority to require public servants to compensate for any damages to the treasury that it discovers. However, there is no formal mechanism for follow-up to the other recommendations that may be contained in the audit reports.

45. The production and dissemination of financial statistics on the federal government is the responsibility of the SHCP. The INEGI, the body that manages the national system of public statistics, does not verify the federal government’s financial statistics. However, the INEGI uses that information to prepare the national accounts.⁷⁰ The national accounts include information on economic activity of subnational levels of government, in addition to the federal government.⁷¹

Coverage of government and the rest of the public sector

49. Redefinition of the coverage of government and of the rest of the public sector, consistent with sound international practice. This will require essentially (1) reassigning all parastatal entities engaged primarily in commercial activities (PEMEX, CFE etc.) from the government to the rest of the public sector;⁷⁵ (2) incorporating in the government sector all the parastatal entities engaged in noncommercial activities, plus possibly estimates of the cost of quasi-fiscal operations of parastatal entities engaged in commercial activities; and (3) consolidating the states and municipalities, together with the central government, under the general government. This new structure of the public sector would clarify the role and influence of the government in the economy, while enabling the government to exercise ownership and financial control over parastatal entities engaged in commercial activities.

50. Preparation of fiscal information in general, and particularly of budget execution reports, in accordance with the recommended institutional coverage. Recommendations (1) and (2) in the preceding paragraph would provide more reliable information on government activities, and would be useful for forecasting and calculating the fiscal stance of the central government. Meanwhile, the activities of commercial parastatal entities would be accounted for under the rest of the public sector.⁷⁶ Consolidation of the accounts of these entities with those of the government would permit measurement of the public sector borrowing requirement—comparable to the coverage in other countries—and assessment of public debt sustainability.⁷⁷ According to recommendation (3), as information on the fiscal position of subnational levels of government becomes available, consolidated accounts could be prepared for the general government and the entire nonfinancial public sector.⁷⁸ Overall, the standard presentation of public sector statistics in this manner would facilitate setting fiscal policy goals and monitoring their implementation, both conducive to a more informed debate on the budget.

Budget documentation

51. Inclusion of a quantitative statement of medium-term objectives, priorities and sustainability of fiscal policy in the budget documentation, indicating the extent to which the annual budget is consistent with those objectives and priorities. The annual budget should be presented in the context of a medium-term macroeconomic and fiscal framework. This rolling multiyear framework, covering a period of three to five years, would be annually updated to show actual performance and the future outlook, including an analysis of medium-term sustainability, possibly for the entire public sector, at a sufficient level of disaggregation.⁷⁹ At least, the PEF should contain initial estimates and outturns of the main fiscal aggregates for the two previous years as well as forecasts for the two following years.⁸⁰

52. Publication of information on the medium-term macroeconomic and fiscal framework stating clearly the methodology, parameters, and supporting macroeconomic assumptions. The recommended macrofiscal framework and clear definitions of the accounting basis and institutional coverage are essential to the application of fiscal rules.⁸¹ This permits construction of medium term expenditure scenarios that would contain, initially at least, estimates of future expenditures under existing policies—including current expenditures generated by planned investments.

53. Publication of a summary volume in the budget document explaining the macroeconomic underpinnings of the budget, the objectives of fiscal policy, and the main budgetary measures. In addition, this PEF volume should include summary tables of revenues and expenditures, compared with those of previous years, classified by functional, institutional, economic, and programmatic category, highlighting new expenditure and tax measures along with an estimate of each measure’s budgetary impact. This would facilitate the explanation of the discrepancies between budgetary forecasts and results (especially if there are legislative measures that become effective in the course of the year) and an overall assessment of the reliability of the initial budget as a guide to the final outcome.

54. Publication of information on quasi-fiscal activities. Publication of this information in the PEF presupposes the systematic identification and quantification of the quasi-fiscal activities of the rest of the public sector, and (insofar as possible) the estimation of their cost, that is, their impact on the budget balance.⁸² This information should, in the first instance, be reported as an annex to the accounting statements of the entities that undertake them.

55. Provision of additional information on contingent liabilities⁸³. and estimates of fiscal risks. Statistics on government guarantees (i.e., without certainty that they will in fact be invoked), including on conditioned PIDIREGAS investment projects, should be presented in terms of accumulated stock and of projected future impact on the budget balance. For purposes of capturing fiscal risk, it is advisable to prepare medium- and long-term fiscal projections (revised annually), including on the financial balance of the social security system. This system encompasses defined-benefit pensions, health-care benefits and other labor liabilities (IMSS, FOVISSTE, ISSSTE, state pension systems, pension funds of PEMEX, CFE and other parastatals) and the transition cost of reforming the IMSS, plus the guaranteed minimum pension, since all of these constitute future obligations for the general government.⁸⁴ In addition, analyses of the sensitivity of budget aggregates to changes in the economic environment are recommended.

Public sector accounts

56. Dissemination of accounting standards and practices. The PEF and the Public Account documents should include the accounting principles and practices used in preparing information on government finances. In particular, the accounting manuals used by the various entities should be made public.

57. Implementation of SIAFF for preparing timely information on the different stages of the expenditure process, and thereby estimating the floating debt. This would allow routine reconciliation of the budget balance against the financial accounts, as well as the calculation of the budget balance on an accrual basis.

58. Adoption of international accounting standards for all public sector transactions. In particular, it will be necessary to correct the recording of PIDIREGAS projects, consistent with these standards, and thus eliminate distortions in fiscal statistics, including in the measurement of the public debt.

Tax transparency

59. Strengthening the transparency of the tax system. Despite the efforts that the authorities have been making, there is still considerable room for simplifying the tax system and making it more transparent. Above all, this calls for greater clarity in the drafting of legislation and regulations. The legal mandate to estimate the cost of tax preferences for the year 2002 should be institutionalized and extended to the preparation of an annual tax expenditure budget—using the functional classification expenditures—for presentation as an annex to the PEF. Such a document would be especially useful in Mexico, where the tax system is subject to annual debate and ratification in Congress. The SAT should also disclose the answers and advance rulings in response to queries by individual taxpayers.

Audit and control

60. Preparation and publication of performance audits. Besides the compliance and financial audits conducted by SECODAM and the Federal Audit Office, there should be a major emphasis on conducting performance audits. For this purpose, it is necessary to begin the development a full-fledged performance auditing system in line with the development of performance-oriented budgeting. This would require additional efforts to define program targets, design and monitor reliable performance indicators, and strengthen and equip the units responsible for conducting them. In addition, it is essential that the conclusions and recommendations in the audit reports (except as they relate to confidential issues, for example, public security and national defense) be widely available to the public, and that compliance with their recommendations be effectively monitored and disclosed.