1.1.1. Coverage of Institutions

Basic

3. In 2016, the public sector in Mexico comprised 2,693 institutional units of various legal forms of which the total expenditure accounted for about 33 percent of GDP (Table 1.2). These entities can be grouped into various sectors in accordance with international standards as follows:

• Budgetary central government (BCG): comprising 32 executive, legislative and judicial bodies (including 18 secretariats, the agrarian court, 2 commissions, 2 councils and the presidential office), 7 autonomous agencies and the Instituto Nacional de Estadística y Geografia – INEGI (bureau of statistics).

• Extra-budgetary central government (EBU): comprising 119 entities which include 33 institutes, 22 research centers, 10 commissions, 9 “organic” trust funds, 9 hospitals, 6 national councils and 6 regional schools.

• Social security sector. comprising 3 social security institutions (pension and health benefits), the Instituto Mexicano del Seguro Social – IMSS, the Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado – ISSSTE, and the Instituto de Seguridad Social de las Fuerzas Armadas Mexicanas – ISSFAM (see Box 1.1).

• State and local governments: comprising the legislative, judiciary and executive bodies of 32 states (including the Ciudad de Mexico) and 2,457 municipalities. There are 65 trust funds at the state level.

• Public corporations: comprising 19 financial and 49 non-financial corporations, including 6 development banks, 2 insurance companies, PEMEX - the Mexican oil company, CFE – the electricity company, and 17 ports administration companies (See Section 3.3.2). It also includes the Mexican Central Bank (Banxico).

4. Fiscal reports in Mexico have traditionally covered only entities fully included in the federal budget, which includes the BCG’s entities, two social security funds⁷ (IMSS and ISSSTE) and the two major non-financial public corporations (PEMEX and CFE). Monthly and quarterly fiscal reports focus on budget execution and financing. The budget fiscal balance, nationally known as “traditional balance”, is still the main indicator for assessing the impact of fiscal policy on the economy.

5. More recently, a fiscal indicator with wider coverage was introduced in fiscal documents, but still does not cover the entire general government or public sector. This indicator, named Public Sector Borrowing Requirements - PSBR (Requerimientos Financieros del Sector Publico - RFSP)⁸, expands the federal budget coverage to include the EBUs (including the non-organic funds⁹: FEIP, FEIEF, FIES, FMP, Fonadin, FEIPEMEX, FARP), the development banks, the IPAB, the PIDIREGAS and debt support program. In the fiscal reports, this indicator is derived from the traditional balance by adding the above-mentioned units and applying some accounting adjustments. In addition, SHCP publishes online¹⁰ PSBR tables, containing breakdowns of revenues and expenditures by economic classification using high-level GFSM 2014 codes. The data is also displayed by sector, using international presentation, including a consolidated central government table; however, those tables have not yet been fully included in the fiscal reports¹¹. The major gaps in terms of coverage are the subnational governments and the central bank.

6. The annual financial statements (Cuenta Pública) are the most comprehensive fiscal report, but there is no consolidation of the subsectors. It includes all the BCG’s entities, the majority of the trust funds, extra-budgetary units, the 3 social security funds and the financial and non-financial corporations. The statements are presented in eight volumes: (i) summary fiscal performance, including budgetary revenues and expenditures and debt position; (ii) the federal government financial statements, which consolidates volumes (iii); (iv); and (v), that include a balance sheet, a statement of operations, and notes, as well as detailed budget execution tables; (iii) the executive branch financial statements; (iv) the legislative branch financial statements; (v) the judicial branch financial statements; (vi) the autonomous agencies’ financial statements; (vii) the parastatal sector financial statements, which comprises the EBUs, the social security sector, the financial and non-financial public corporations; and (viii) the PEMEX and CFE financial statements. There is no consolidation (nor aggregation) of subsectors¹², each volume being an independent financial statement.

7. In 2016, the financial statements covered 89 percent of gross public sector expenditures, but a major part of it are transfers to subnational governments (Figure 1.1). The major omissions are the subnational governments, the Central Bank and the non-organic funds: FEIP, FEIEF, FIES, FMP, Fonadin, FEIPEMEX, FARP, among others.

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Coverage of Public Sector Institutions in Fiscal Reports

(in percent of expenditure)

Citation: IMF Staff Country Reports 2018, 289; 10.5089/9781484379820.002.A001

Source: Staff estimates.Note: “Not Reported” refers to expenditures of units not consolidated in fiscal reports. The major gaps in financial statements and PSBR are subnational governments and the central bank while the traditional fiscal statistics also do not cover EBUs and financial public corporations.

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8. Subnational governments account for around 35 percent of the net public sector expenditure, but are not consolidated in any fiscal report (Table 1.2).¹³ States and municipalities finance their operations with federal transfers in the form of revenue sharing mechanisms (participaciones y aportaciones¹⁴), voluntary transfers, and co-financed projects (convenios). Transfers to subnational governments represented around 40 percent of the federal budgetary expenditures in 2016 (MXN 1.7 trillion); although this figure is shown in budget documents, the final utilization¹⁵ of these resources is disclosed partially due to the absence of a fiscal report consolidating the subnational finances¹⁶.

Table 1.2.

Public Sector Institutions and Finances, 2016

(in percent of GDP, unless otherwise stated)

Sources: Annual financial statements 2016; Quarterly fiscal report fourth quarter 2016; Annual GFS questionnaire 2016; Individual financial statements for the states 2016; Individual financial statements for public corporations; Banxico’s annual financial statements 2016; Estadísticas Oportunas database; INEGI database on subnational finances 2016; and staff estimates.

Table 1.2.

Public Sector Institutions and Finances, 2016

(in percent of GDP, unless otherwise stated)

				Number of entities	Revenue	Expenditure	Balance	Intra-PS expenditure	Net expenditure	percent net expenditure
Public Sector				2,693	28.8	32.9	-4.0	0.0	32.9	100.0
	General government			2,624	23.7	26.4	-2.7	1.8	24.6	75.0
		Central government		160	20.5	23.6	-3.0	10.6	12.9	39.3
			Budgetary central government	38	17.7	20.6	-2.8	13.5	7.1	21.5
			Extrabudgetary units and funds	119	1.3	1.7	-0.4	0.0	1.7	5.1
			Social Security	3	4.4	4.2	0.2	0.0	4.2	12.7
		State governments		32	10.1	9.9	0.2	0.0	9.9	30.0
		Local governments		2,432	1.9	1.9	0.1	0.0	1.9	5.6
	Central Bank			1	0.2	0.5	-0.2	0.0	0.5	1.4
	Nonfinancial public corporations			49	9.9	11.2	-1.2	3.6	7.6	23.0
	Other financial public corporations			19	1.5	1.4	0.1	1.2	0.2	0.6

Sources: Annual financial statements 2016; Quarterly fiscal report fourth quarter 2016; Annual GFS questionnaire 2016; Individual financial statements for the states 2016; Individual financial statements for public corporations; Banxico’s annual financial statements 2016; Estadísticas Oportunas database; INEGI database on subnational finances 2016; and staff estimates.

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Table 1.2.

Public Sector Institutions and Finances, 2016

(in percent of GDP, unless otherwise stated)

				Number of entities	Revenue	Expenditure	Balance	Intra-PS expenditure	Net expenditure	percent net expenditure
Public Sector				2,693	28.8	32.9	-4.0	0.0	32.9	100.0
	General government			2,624	23.7	26.4	-2.7	1.8	24.6	75.0
		Central government		160	20.5	23.6	-3.0	10.6	12.9	39.3
			Budgetary central government	38	17.7	20.6	-2.8	13.5	7.1	21.5
			Extrabudgetary units and funds	119	1.3	1.7	-0.4	0.0	1.7	5.1
			Social Security	3	4.4	4.2	0.2	0.0	4.2	12.7
		State governments		32	10.1	9.9	0.2	0.0	9.9	30.0
		Local governments		2,432	1.9	1.9	0.1	0.0	1.9	5.6
	Central Bank			1	0.2	0.5	-0.2	0.0	0.5	1.4
	Nonfinancial public corporations			49	9.9	11.2	-1.2	3.6	7.6	23.0
	Other financial public corporations			19	1.5	1.4	0.1	1.2	0.2	0.6

Sources: Annual financial statements 2016; Quarterly fiscal report fourth quarter 2016; Annual GFS questionnaire 2016; Individual financial statements for the states 2016; Individual financial statements for public corporations; Banxico’s annual financial statements 2016; Estadísticas Oportunas database; INEGI database on subnational finances 2016; and staff estimates.

9. The national definition of subsectors differs from the international standards (GFSM 2014), undermining the usefulness of fiscal reports in supporting public debate and international comparison. The public sector is organized under the national classification into two subsectors: (i) federal budgetary public sector, comprising BCG’s units, the social security funds, PEMEX and CFE; and (ii) parastatal sector, comprising the EBUs, “organic” trust funds, financial and non-financial corporations except PEMEX and CFE. The stabilization funds, the subnational governments and the Central Bank are not taken into account. Volume (vii) of the financial statements has a second classification layer that can be used to sectorize the parastatals according to international standards. This exercise is being applied by SHCP to disseminate the PSBR by sector (under international standards) on its website, and authorities intend to gradually introduce this presentation in the in-year fiscal reports. Nevertheless, the current national presentation makes it difficult for an outsider to have a clear view of the public sector fiscal stance and the interactions between the corresponding subsectors.

Box 1.1.

The Mexican Pension System

The Mexican pension system is fragmented and complex. Multiple pension schemes covering private sector employees and different categories of civil servants and military personnel coexist. There are two main schemes, IMSS and ISSSTE, and several special regimes covering public sector employees (PEMEX, CFE, IMSS-patrón, ISSFAM, Development Banks, other government agencies, universities, subnational governments) and few closed special regimes (LyFC, Ferronales). The main features of these schemes are described below.

Two main schemes cover the majority of the population:

• IMSS (Instituto Mexicano del Seguro Social): The IMSS covers private sector workforce. The scheme was reformed in 1997 to replace a defined-benefit Pay-as-You-Go (PAYGO) system by a defined-contribution regime with individual retirement accounts. Each worker contributes 1.125% of the quotation base wage, employer contributes 5.150%, and government pays 0.225% (total contribution reaches 6.5%) plus 5% for housing and a social fee depending on the salary level for workers with salary below a threshold equivalent to 15 times the monthly UMA (Unit of Measure and Updating – monthly UMA in 2016 was MXN 2,220.42), all of which are remitted to the individual account balance to finance pension payments upon retirement. Individuals who contributed before 1997 were grandfathered—at retirement, they can choose their pension to be calculated under the old PAYGO regime if this is higher than their entitled pension in the individual account. Those who choose the old system must return part of the balance of their individual account to the government at retirement.

• ISSSTE (Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado): The ISSSTE covers public sector employees. It was reformed ten years later, in 2007, with the same approach of a defined-contribution regime replacing the previous PAYGO system. Worker’s contributions are 6.125% of the quotation wage, and government contributions are: 5.175% for retirement, (total contribution 11.3%) plus 5% of housing, and 5.5% of a minimum wage as a social fee, regardless of the salary. In addition, there are voluntary savings “Ahorro solidario” which increases the contribution of the workers. Individuals who contributed before 2007 had the option, but not the obligation to join the new system. Those who migrated were given a recognition bond to account for contributions prior to the reform and those who stayed in the old regime will receive pension payments under the PAYGO rules, but with parametric changes on eligibility criteria.

Other special regimes covering public sector employees:

• Regimes of PEMEX and CFE: They cover workers of the two largest public corporations. These two PAYGO schemes provide more generous benefits and laxer eligibility requirements relative to other systems, but both were subject to a change towards a defined-contribution approach and to parametric reforms¹ in 2015 to reduce the corresponding unfunded pension liabilities. In return, government issued pension bonds to these companies to the magnitude of the net present value of future pension savings.

• ISSFAM (Instituto de Seguridad Social para las Fuerzas Armadas Mexicanas): The ISSFAM covers military personnel and pension payments are mainly funded/covered by the federal budget.

• Other schemes include schemes for Development Banks, other government agencies, universities, IMSS-patrón; and closed special regimes (LyFC, Ferronales). These regimes generally provide more generous benefits than the main systems and are mainly funded by the federal budget.

There are also pension schemes at the subnational level that are generally funded by state and local budgets.

The actuarial pension liability in Mexico considering the ISSSTE and the special regimes reached MXN 9.2 trillion (46.9 percent of GDP) in 2016. Actuarial calculations for IMSS-PAYGO are not available.

Pension Scheme		Actuarial Liability
		MXN trillion	% of GDP
Liability		9,166	46.9
	ISSSTE - PAYGO	5,409	27.7
	PEMEX	1,220	6.2
	CFE	499	2.6
	IMSS-patrón	1,722	8.8
	Other	316	1.6
Contingency		na	na
	IMSS - PAYGO	na	na
TOTAL		9,166	46.9

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Pension Scheme		Actuarial Liability
		MXN trillion	% of GDP
Liability		9,166	46.9
	ISSSTE - PAYGO	5,409	27.7
	PEMEX	1,220	6.2
	CFE	499	2.6
	IMSS-patrón	1,722	8.8
	Other	316	1.6
Contingency		na	na
	IMSS - PAYGO	na	na
TOTAL		9,166	46.9

According to the GFSM 2014, the statistical treatment of pension schemes depends on whether the scheme is contributory or not, whether it is a defined-benefit or defined-contribution, and whether it is a social security or employment-related scheme. For defined-benefit schemes, the statistical treatment depends on the type of beneficiaries: when the beneficiary is the general population, or a large segment of the general population, the scheme is considered a social security scheme; whereas if individuals, households, or a group of employees are eligible to receive social benefits, the scheme would be considered an employment-related social insurance scheme. Under social security schemes, the link between benefits and contributions is not considered sufficiently strong to give rise to a financial claim on the part of contributors. As a result, no liabilities are recorded, but an estimate equal to the net implicit obligations for future social security benefits should be presented as a memorandum item to the balance sheet. Employment-related pension schemes are, on the contrary, considered to involve a contractual liability towards employees and registered as liabilities.

According to this criterion, the actuarial liabilities of the ISSSTE (old PAYGO scheme), and the special regimes in Mexico would be recognized in the public sector financial statements as firm liabilities, while the old PAYGO IMSS scheme would be considered as contingent liabilities.

Source: Annual Consolidated Financial Statements, 2015; and GFSM 2014 ¹ CFE’s pension system switched from defined-benefit to defined-contribution in 2008, and it was subject to additional parametric reforms in 2015.

1.1.2. Coverage of Stocks

Basic

10. The Cuenta Pública and the quarterly fiscal reports cover cash and debt positions; the information provided on other financial assets and liabilities is not comprehensive. The financial statements also present a balance sheet containing data on financial and non-financial assets and liabilities by subsector without consolidation, but the existence of relevant unreported items and recording problems prevents Mexico from meeting more advanced practices under the FTC. These weaknesses in the financial statements have been constantly highlighted by the ASF since 2012 (see section 1.4.2) and some improvements have been achieved so far, but important gaps persist. Figure 1.2 illustrates the size of the missing items:

• Subsoil assets are not reported (11 percent of GDP): PEMEX regularly produces estimates¹⁷ of the monetary value of proved petroleum reserves (covering about 90-95 percent of Mexico’s proved reserves) but it is not incorporated in the financial statements. For end-2016, the value PEMEX’s estimates reached 11 percent of GDP (see section 3.2.6).

• Nonfinancial assets are not properly recorded: the valuation of fixed assets (property, plant, equipment) and land is based on historic cost instead of market values. Where an entity reports an item using historic cost, international standards often encourage disclosure of market values if there is a material difference between the reported cost and the item’s market value. More importantly, CONAC¹⁸ has established that nonfinancial assets held by the Executive Branch are not subject to depreciation,¹⁹ which tends to overvalue such assets. In the 2016 auditing cycle, ASF has found unverified stocks of around 2.5 percent of GDP in highways infrastructure. Finally, the General Law on National Assets defines non-financial assets that are considered to be on “public domain” (roads, bridges, highways, ports, among others); therefore, those assets are not recorded in the financial statements according to the General Law on Governmental Accounting. This regulation is still not operational – 2016 financial statements include public domain assets, but the balance sheet will be materially affected by the time UCP decides to fully adopt such rule.

• Employment-related pension liabilities are partially reported (47 percent of GDP - see Box 1.1): international standards require the liabilities under employment-related pension schemes to be fully reflected in the public sector balance sheet. The national accounting regulation on employment-related benefits (NIFD-3, Norma de Información Financiera D-3) seems to be broadly aligned to IPSAS, but it is still not reflected in Cuenta Pública. IMSS and ISSSTE adopted, for the first time, NIFD-3 practices to prepare their financial statements 2016. They both presented two sets of statements, one including the pension liability estimated following NIFD-3, and the other not; the latter was taken to compose the Cuenta Pública. Liabilities related to the special pension schemes (armed forces, courts, development banks) are also not reported in Cuenta Pública, except for PEMEX and CFE, which have already incorporated in their statements the liabilities derived from their respective pension schemes. The total public sector pension liability amounted to 47 percent of GDP, of which only 8.7 percent of GDP is reported in the statements.

• Financial liabilities related to PPPs are not reported (0.2 percent of GDP): there is currently a portfolio of 22 projects being executed under PPP arrangements, which accounts for liabilities of around 0.2 percent of GDP. Despite the relative small amount, government has plans to foster PPPs contracts in the coming years. There is currently no reporting on PPPs in financial statements and fiscal reports. International standards (IPSAS 32 and GFSM 2014) require recognition of assets and corresponding liabilities as assets are constructed. Federal and local governments are working to enhance the accounting framework for PPPs to make it broadly aligned with IPSAS 32.

• Debt securities are mainly registered²⁰ at face value rather than market value or nominal value²¹ (6 percent of GDP). The Cetes²² (T-bills) and Udibonos Segregados are the only debt instruments registered at nominal value. The long-term T-bonds (Bondes “D”, Bonos de Desarrollo, Udibonos) are all registered at face-value, which represents 87% of total stock of debt securities. The difference between the discounted issue price of T-bonds and their face value is recorded as an asset in Cuenta Pública, which accounted for 6 percent of GDP by end-2016. Following international standards, debt securities issued at a discount (or premium) are recorded at the issue price (nominal value). The difference between the discounted issue price of such debt securities and their price at maturity (face value or redemption price) is treated as interest accruing over the life of the debt security.

• Treasury securities used by the Banxico for liquidity management are only partially reported (25 percent of GDP – see APPENDIX 1). Banxico has been using T-bonds issued directly by the Treasury for liquidity management. At end 2016, a stock of about 4.9 percent of the GDP in T-bonds has been placed in the market through the Banxico monetary policy management arrangement, and an additional 20 percent in treasury securities is held by the bank to be used in monetary open market operations. In the official debt statistics²³ (traditional, SHRFSP and PFN), these securities are not considered as central government (or general government, GG) debt while in Cuenta Pública it is reported under a specific liability line item, not under the debt heading. This contrasts with the treatment in the GFSM, where Treasury securities are considered a debt liability of the CG and GG, regardless if it’s issued to the market through the Central Bank or directly by the Treasury. In addition, the Central Bank is considered a public financial institution, and, as such, its Treasury securities holdings are also considered a debt liability of the GG. Moreover, in Mexican framework, the treasury is responsible for repaying the bonds at maturity, although the bank bears the interest costs over the period.

• Assets and liabilities at the subnational level are not reported (assets: 7.8 percent of GDP; liabilities: 3.6 percent of GDP). Subnational finances are not included in any fiscal report. Based on available information, states have assets of around 7.8 percent of GDP, mainly non-financial assets, while the total liabilities of states and municipalities amounted for 3.6 percent of GDP, three-fourth of it being credit loans.

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Public Sector Balance Sheet Coverage in Fiscal Reports, 2016

(percent of GDP)

Citation: IMF Staff Country Reports 2018, 289; 10.5089/9781484379820.002.A001

Sources: Quarterly fiscal report, Cuenta Pública 2016 and staff estimates.

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11. The published volume II (Tomo II) of the Cuenta Pública of the Federal Government shows a negative net worth of 21 percent of the GDP by December 2016, whereas the missing items would have improved the financial position by 7.8 percent of GDP (Table 1.3). Total reported assets amounted to 50.4 percent of GDP, of which 6.9 percent of GDP were in the form of fixed assets (buildings, machinery and infrastructure), 25.3 percent correspond to deposits in the Treasury restricted account held in the Banxico under the monetary regulatory framework (see APPENDIX 1), 7.0 percent in equity on parastatals and public corporations, and 1.7 percent in equity on non-organic trust funds. There is an accounting asset record related to the discount on issuance of long term T-bond (6.3 percent of GDP), since face value is applied as valuation method of debt securities on the liability side of the balance sheet. Reported Liabilities accounted for 71.2 percent of GDP, of which 65.5 percent of GDP corresponds to T-bonds (at face value), including 25.3 percent of GDP on the monetary regulatory framework, 4.4 percent of GDP on loans and 1.2 percent of GDP on accounts payable. Table 1.3 presents the published balance sheet position and the adjustments in line with international standards, which would increase the net worth by 7.8 percent of GDP.

Table 1.3.

Public Sector Balance Sheet Coverage in Fiscal Reports, 2016

(percent of GDP)

Source: Cuenta Pública 2016 and staff estimates.

Table 1.3.

Public Sector Balance Sheet Coverage in Fiscal Reports, 2016

(percent of GDP)

				MXN billion		percent of GDP
				Cuenta Pública	GFSM Budgetary	Cuenta Pública	GFSM Budgetary
				Tomo II	Central Gov.	Tomo II	Central Gov.
Total Assets				9,852	10,170	50.4	52.0
	Non-Financial Assets			1,343	3,553	6.9	18.2
		o/w: Unreported Subsoil Assets		...	2,210	...	11.3
	Financial Assets			8,509	6,617	43.5	33.9
		o/w: Monetary Reg.		4,938	4,938	25.3	25.3
		o/w: Trust funds		332	332	1.7	1.7
		o/w: Equity in parastatals		1,369	1,044	7.0	...
		o/w: Discount in T-bonds		1,235	...	6.3	...
Total Liabilities (a) + (b)				13,911	12,718	71.2	65.1
	Reported Liabilities (a)			13,911	12,676	71.2	64.9
		Debt Securities		12,806	11,571	65.5	59.2
			o/w: Monetary Reg.	4,938	4,938	25.3	25.3
		Loans		862	862	4.4	4.4
		Accounts Payable		243	243	1.2	1.2
		Pensions		0	0	0.0	0.0
		Other (mainly equity/deposits)		0	0	0.0	0.0
	Unreported Liabilities (b)			...	42	...	0.2
		Unreported Pensions		...	...	...	...
		Unreported PPP Liabilities		...	42	...	0.2
Net Financial Worth				-5,402	-6,101	-27.6	-31.2
Net Worth				-4,059	-2,548	-20.8	-13.0

Source: Cuenta Pública 2016 and staff estimates.

View Table

Table 1.3.

Public Sector Balance Sheet Coverage in Fiscal Reports, 2016

(percent of GDP)

				MXN billion		percent of GDP
				Cuenta Pública	GFSM Budgetary	Cuenta Pública	GFSM Budgetary
				Tomo II	Central Gov.	Tomo II	Central Gov.
Total Assets				9,852	10,170	50.4	52.0
	Non-Financial Assets			1,343	3,553	6.9	18.2
		o/w: Unreported Subsoil Assets		...	2,210	...	11.3
	Financial Assets			8,509	6,617	43.5	33.9
		o/w: Monetary Reg.		4,938	4,938	25.3	25.3
		o/w: Trust funds		332	332	1.7	1.7
		o/w: Equity in parastatals		1,369	1,044	7.0	...
		o/w: Discount in T-bonds		1,235	...	6.3	...
Total Liabilities (a) + (b)				13,911	12,718	71.2	65.1
	Reported Liabilities (a)			13,911	12,676	71.2	64.9
		Debt Securities		12,806	11,571	65.5	59.2
			o/w: Monetary Reg.	4,938	4,938	25.3	25.3
		Loans		862	862	4.4	4.4
		Accounts Payable		243	243	1.2	1.2
		Pensions		0	0	0.0	0.0
		Other (mainly equity/deposits)		0	0	0.0	0.0
	Unreported Liabilities (b)			...	42	...	0.2
		Unreported Pensions		...	...	...	...
		Unreported PPP Liabilities		...	42	...	0.2
Net Financial Worth				-5,402	-6,101	-27.6	-31.2
Net Worth				-4,059	-2,548	-20.8	-13.0

Source: Cuenta Pública 2016 and staff estimates.

12. Taking a consolidated view of the public sector balance sheet, however, the net worth reaches a negative 50 percent of GDP, which is lower in comparison to Mexico’s peers in the region and other comparable emerging economies (Figure 1.3). Total public sector estimated liabilities amounted to about 123.9 percent of GDP of which 52.3 percent of GDP are in the form of debt securities; including T-bills, T-bonds and treasury securities sold by Banxico for monetary policy operations (see APPENDIX 1). Pension liabilities accounted for 46.9 percent of GDP and loans for 12.7 percent of GDP. Estimated assets amounted to 73.9 percent of GDP of which 39.9 percent of GDP in fixed assets, 11.3 percent of GDP in petroleum reserves, and 34.0 percent of GDP in financial assets (deposits, international reverses and financial investments).

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Public Sector Net Worth in Selected Countries

(percent of GDP)

Citation: IMF Staff Country Reports 2018, 289; 10.5089/9781484379820.002.A001

Sources: FTE reports.

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1.1.3. Coverage of Flows

Basic

13. Fiscal reports widely used for policy discussions are compiled on a cash basis of recording, including revenues, expenditures and financing. Revenue is recorded when cash is collected by SAT, the Treasury or local tax agencies, and expenditure by the time payment is made by spending units. Budget execution also records expenditure data on a modified cash basis (devengado), i.e., registered when the obligation for payment is recognized²⁴, but this information is not used to compile the fiscal balance (traditional and PSBR) and other fiscal indicators. Some minor in-kind fiscal transactions are incorporated in the fiscal reports on market value basis. Although IMSS, ISSSTE, PEMEX, and CFE produce financial information on accrual basis, only cash flows are submitted²⁵ to SHCP for compiling the monthly and quarterly fiscal reports. The data for IPAB, FONADIN and development banks are taken on a modified-cash basis in the PSBR compilation methodology.

14. The statistical treatment of the capital payments from the Banxico (ROBM) is not in line with the international standards. In the last three years the SHCP received significant capital payments from the Banxico in the form of distribution of operational gains of the bank.²⁶ These transfers were treated as dividends in fiscal statistics, positively affecting the fiscal balances (traditional and PSBR). However, the Banxico’s gains mainly reflected unrealized profits due to the effect of MXN’s depreciation on the valuation of the large stock of international reserves, which is denominated in foreign currencies (mainly US$). In accordance with the GFSM 2014, the transfer of unrealized gains/losses from exchange rate valuation associated with international reserves is treated as other economic flows, not affecting the fiscal balance (see APPENDIX 1). (An adjustment approach is illustrated on Figure 1.4 below).

15. The statistical treatment of the transactions related to FEIP’s investment in financial instruments for hedging oil-price risks should also be revised. FEIP is one of the revenue stabilization funds outside of the federal budget boundaries. Therefore, the budgetary transfers to the fund (based on proceeds from oil sales) and the withdraws from the fund (to compensate for a reduction in budget revenues) are both captured in the traditional balance indicator. Furthermore, the fund is included in the coverage of the wider PSBR indicator, but the transactions it performs in the international financial markets have an asymmetric treatment in the calculation of such fiscal indicator. The fund operates by acquiring financial instruments for hedging oil-price volatility, mainly option contracts. GFSM 2014 recommends that such transactions (including the execution of the option) should be treated below-the-line (net acquisition of financial assets). Authorities claim that the fund, regardless of the financial instrument used, operates under a revenue insurance mechanism, which justifies the above-the-line recording. Apart from this debate, a major issue to be addressed is the fact that the two sides of such transaction are being treated asymmetrically in the PSBR indicator: the outflows from the fund to acquire the option/insurance are taken below-the-line while the inflows from executing the option/calling the insurance are recorded above-the-line. As a result, the PSBR indicator has been positively distorted (Table 1.4). The proper statistical treatment could be further investigated²⁷, but a symmetric approach should be immediately implemented – the short-run pragmatic alternative would be to record the payments from the fund as expenses above-the-line (this approach is taken on Figure 1.4 below).

Table 1.4.

FEIP’s Oil Hedging Program

(percent of GDP)

Source: SHCP.

Table 1.4.

FEIP’s Oil Hedging Program

(percent of GDP)

	percent of GDP
	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016
Cash Outflow	0.08	0.08	0.05	0.06	0.08	0.13	0.08	0.10	0.08	0.03	0.07	0.06	0.09
Cahs Inflow	-	-	-	-	-	0.53	-	-	-	-	-	0.59	0.25
Recorded impact on PSBR	-	-	-	-	-	0.53	-	-	-	-	-	0.59	0.25
Adjusted impact on PSBR	-0.08	-0.08	-0.05	-0.06	-0.08	0.40	-0.08	-0.10	-0.08	-0.03	-0.07	0.53	0.16

Source: SHCP.

View Table

Table 1.4.

FEIP’s Oil Hedging Program

(percent of GDP)

	percent of GDP
	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016
Cash Outflow	0.08	0.08	0.05	0.06	0.08	0.13	0.08	0.10	0.08	0.03	0.07	0.06	0.09
Cahs Inflow	-	-	-	-	-	0.53	-	-	-	-	-	0.59	0.25
Recorded impact on PSBR	-	-	-	-	-	0.53	-	-	-	-	-	0.59	0.25
Adjusted impact on PSBR	-0.08	-0.08	-0.05	-0.06	-0.08	0.40	-0.08	-0.10	-0.08	-0.03	-0.07	0.53	0.16

Source: SHCP.

16. The annual financial statements present some flows on accrual-basis; however, significant accrued transactions are omitted. The Cuenta Pública contains a statement of operations with accrued revenues and expenditures, including accounts payable/receivable, depreciation (except for the Executive Branch), revaluations of assets (including equity holdings) and liabilities, and other economic flows generated by changes in currency exchange rates. The major omission is the unreported annual net accrual of employment–related pension liabilities, which was estimated²⁸ at 2.3 percent of GDP in 2016 for all special pension schemes (PEMEX, CFE, IMSS-patrón, development banks) and ISSSTE. Depreciation of fixed assets held by the executive branch²⁹ (around half of total public sector fixed assets) is another significant gap as well as the lack of accrual recording of interest on discounted long-term T-bonds (see paragraph 10 above). Finally, flows related to PPP contracts are not recorded because IPSAS 32 has not yet been adopted.

17. National accounting practices are still in an early stage of development, since IPSAS have not yet been implemented. The Government Accounting Conceptual Framework (Marco Conceptual de Contabilidad Gubernamental – MCCG) issued by CONAC establishes that the national regulations take precedence over international standards. There are over 70 regulations on accounting practices and standards issued by CONAC to date, which are of mandatory compliance for government agencies. Although some IPSAS elements have been taken as general references by CONAC, IPSAS have not yet been adopted.³⁰ The ongoing initiative of federal and local governments to enhance the accounting framework for PPPs in line with IPSAS 32 is most welcome. Such initiative should be considered as a first step towards a gradual implementation of IPSAS in Mexico.

18. Cash-to-accrual and coverage adjustments would increase the Mexican public sector deficit by 3.5 percent of GDP in 2016, mainly due to ROBM and FEIP oil hedging program adjustments and accrual of pension entitlements. Adjusting the statistical treatment of the ROBM and FEIP oil hedging program would increase the cash deficit to 4.1 percent of GDP, 1.3 percent higher than currently reported in fiscal reports. The balance does not alter in the case where Banxico and subnational governments (on cash-basis) are included in the coverage; nevertheless, the public sector net borrowing reaches 6.3 percent of GDP when the accrued expenses related to pension entitlements and PPP contracts are taken into account (Figure 1.4).

19. Despite being broadly covered in fiscal reports, cash transactions within public sector entities are difficult to follow through in the reports, which poses a challenge for fiscal transparency. There is a complex system of transfers within public sector entities in Mexico, some of which are driven by multiple-tiers earmarking mechanisms (see section 2.1.1) and the multiplicity of trust funds (revenue stabilization and spending funds). This system also reflects the unique national sectorization of public entities that applies to the federal budget allocation and to the dissemination of fiscal statistics (Figure 2.1). These transfers are reported in several tables in multiple reports, but each one with a different presentation format and coverage. Reconciliation of the figures between the tables is not easy and there is no guidance on how to interpret the data.

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Cash to Accrual and Coverage Adjustments, 2016

(Percent of GDP, unless otherwise stated)

Citation: IMF Staff Country Reports 2018, 289; 10.5089/9781484379820.002.A001

Sources: Quarterly fiscal report, Cuenta Pública 2016 and staff estimates.Note: Depreciation of fixed assets reached 1.0 percent of GDP, affecting the operating balance, but not deteriorating the net lending.

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1.1.4. Tax Expenditures

Good

20. The federal government has been publishing an annual report on the estimated revenue loss from tax expenditures since 2002. In compliance with the provisions of Article 30 of the Federal Revenue Law, this report on tax expenditures is delivered to the Congress³¹ by June 30 each year. The report is published on the SHCP’s website. It covers the current year and the coming fiscal year. The report defines tax expenditures, explains the methodology used for calculating revenue losses, and breaks down the information by category of tax (e.g., corporate and personal income tax, VAT, etc.), by expenditure (e.g., deductions, exemptions, deferrals, etc.) and by economic sector (e.g., agriculture, mining, construction, etc.). However, the budgetary goal and target for the size of tax expenditures is not defined in a policy statement issued by the government.

21. Tax expenditures in Mexico are relatively moderate compared to other countries (Figure 1.5). Total tax expenditure in 2018 is estimated to be around 3.5 percent of GDP (Figure 1.6). However, the tax expenditures as a share of total tax revenues is relatively high at 26.6 percent. After the income tax reform in 2014, the overall level of tax expenditures fell, particularly for corporations, but increased slightly in 2017 and 2018. This change is largely related to the implementation of the energy reform package which provided a fiscal stimulus during the transition to market-based fuel rates. Almost 45 percent of all tax expenditures, corresponding roughly to 1.5 percent of GDP (Figure 1.7), relate to VAT, the largest of which are revenue losses due to reduced rates. A similar share relates to corporate and personal income taxation, including employment subsidies and exemptions of personal income tax.

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Revenue Loss from Tax Expenditures in Selected Countries (Percent of GDP)

Citation: IMF Staff Country Reports 2018, 289; 10.5089/9781484379820.002.A001

Source: IMF Staff Estimates (IMF Fiscal Monitor, April 2011, for other countries.; UK Fiscal Transparency Evaluation 2016 for UK). Note: Estimates are for 2010, except for Guatemala (2009) and UK (FY 14/15)

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Tax expenditures

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Mexico: Level of Tax Revenues and Tax Expenditures, 2013-2018 (Percent of GDP)

Citation: IMF Staff Country Reports 2018, 289; 10.5089/9781484379820.002.A001

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Mexico: Tax Expenditures, 2013-2018

Citation: IMF Staff Country Reports 2018, 289; 10.5089/9781484379820.002.A001

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Source: Annual report on tax expenditures and Public Account (SHCP website)

22. In Mexico, the discussion of tax expenditures and the annual budget takes place at different times. Tax expenditures can be a substitute for or complement direct spending programs. Therefore, ideally, they should be discussed alongside proposals for new spending to allow proper prioritization and allocation of public resources. Although in Mexico, the budget proposal is submitted later than the report on tax expenditures³² and should include a chapter on tax expenditures, in practice the link between these two documents and the decision making on alternative options is weak. The annual revenue law contains only a summary of tax expenditures without a table describing the main tax expenditures and related revenue losses. Providing full information on all tax expenditures in the budget documents would show which groups and sectors currently benefit from exemptions, and the extent of overall revenue loss. As a result, it would improve the transparency of policy-making.

1.2.1. Frequency of In-Year Reports

Advanced

23. SHCP publishes fiscal reports on a monthly basis with a 30-day lag and the quarterly fiscal report is available within a month from the end of the quarter. The monthly fiscal bulletin and the monthly fiscal report containing the cash-based fiscal statistics (traditional balance, RFPS, financing and debt position) are disseminated on a monthly basis and within 30 days of the end of each month. The monthly report on grants to subnational governments is published with a 15-day lag. Finally, the quarterly fiscal report is sent to Congress and published in the SHCP’s website 30 days after the end of the reference quarter. The above-mentioned monthly and quarterly frequencies for the disclosure of fiscal data, as well as the content the reports, are established in detail by the LFPRH (article 107) and the SHCP has regularly complied with these legal provisions.

1.2.2. Timeliness of Annual Financial Statements

Advanced

24. The Constitution (article 74) mandates the publication of final accounts (Cuenta Pública) by end-April and audited statements by end-October. The SHCP has consistently met the dates and AFS has produced its auditing report to the chamber of deputies with the legal 8 months after the year end. The constitution allows for an extension in the dates on a maximum of 30 additional days on both deadlines. The statements submitted to congress by end-April are final. SHCP publishes the financial statements on its website upon submission to the legislative.

1.3.1. Classification

Not met

25. The fiscal reports in Mexico include information classified by administrative, economic, functional, and program categories. The administrative classification is based on the existing structure of the budgetary units. The economic classification is broadly aligned with GFSM 1986 and is quite detailed. The functional classification used in the budget and SHCP’s quarterly reports largely follows the United Nations’ Classification of Functions of Government (COFOG), but has been adjusted to match the structure of sectors in Mexico³³. As defined in the FRBL, a key element of the budget is its programmatic structure, which is submitted to the Chamber of Deputies by June 30 of each year. The classification and reporting structure is harmonized across budget and accounting systems, and is shared by the federal, state, and local levels of government.

26. The economic and functional classifications have yet to comply with international standards, and the government is preparing changes to the classification of fiscal statistics to achieve this. The SHCP publishes more detailed statistical tables by economic classification on its website. However, these tables do not contain all information necessary to produce GFSM 2014-compliant fiscal statistics. Importantly, the SHCP has developed bridging tables to produce reports by economic classification consistent with the GFSM standards. These tables were submitted to the IMF in the beginning of 2018, but at the time of the mission, had not been published by the government. Publication of this additional information would improve the rating of this indicator.³⁴

1.3.2. Internal Consistency

Good

27. Fiscal reports include two out of the three reconciliations prescribed by the FT code. The annex on public debt of the quarterly fiscal report present extensive information on debt issuance, redemption, and opening and closing position, by debt instruments, counterpart residency, currency, and maturity. The reconciliation between the financing and change in debt position is not explicitly presented, but can be easily derived from the additional tables on the change in net debt.

28. The financing data presented in the traditional balance table is not comparable with financing figures shown in the table of reconciliation between financing and the change in net debt, due to the valuation method applied to debt securities (face value). This happens because in all debt tables, gross debt, net debt, change in net debt, the stock of T-bonds are registered at face value, as well as the flows of issuance of such securities. The only exceptions are the Certificados de Tesorería – Cetes and the Udibonos Segregados, which represented only 13 percent of the debt stock in treasury securities by the end of 2016. Therefore, the consistency between the cash fiscal balance (traditional) and the stock of net debt is not guaranteed. This issue should be addressed by changing the valuation method of T-bonds to nominal value in order to ensure that the fiscal balance performance indicator allows for a proper assessment of the debt dynamics.

29. The reconciliation between fiscal balance and financing is not provided and cannot be easily derived. Although this reconciliation is key to ensure consistency of fiscal data, fiscal reports do not assess the discrepancies between above and below-the-line calculations of fiscal balance. The monthly fiscal bulletin presents no discrepancy between the traditional balance and the financing for the social security funds (IMSS and ISSSTE) and the two “productive” public corporations (PEMEX and CFE), which is quite unusual. The financing (below-the-line) for the federal government is published in supplementary tables available online, but without any reconciliation with the above-the-line statistics presented in the reports. Comparing the two figures, one also finds an unusual zero discrepancy.³⁵

30. However, discrepancies have been contained on both fiscal balance indicators, traditional and PSBR. Discrepancy between above-the-line and below-the-line deficit for the federal government (traditional balance) marked 0.02 percent of GDP in 2015 and was technically zero in 2016. Such figures were provided by the authorities since the information available online shows no difference between fiscal balance and financing (see paragraph below). Taking the wider PSBR indicator for the federal public sector, the average discrepancy was 0.27 percent of GDP over the period 2008-2017, surpassing the threshold of 0.1 percent of GDP in 2009 and 2017 (Figure 1.8). The discrepancy series for the PSBR is available on SHCP’s website in the Estadísticas Oportunas database.

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Mexico: Statistical Discrepancy between Fiscal Balance and Financing

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 289; 10.5089/9781484379820.002.A001

Sources: Fiscal Reports and additional information provided by authorities.

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1.3.3. Historical Revisions

Not met

31. Revisions to data on fiscal aggregates are not disclosed in fiscal reports, although ex-post revisions appear not to be significant. Fiscal statistics are initially released as provisional and become final upon the publication on the audited financial statements (18 months later). Over this period, revisions to provisional statistics can be performed based on updated source data, but the public is not informed of these changes. Final outcomes appear as new figures in future fiscal reports, without any comparison, explanation or bridging tables reconciling the different vintages. The online SHCP’s database is updated retroactively whenever there is a change to sources and methods, in order to revise historical data. Over the last few years, annual revisions to the fiscal balance were less than 0.1 percent of GDP.

32. SHCP assesses the magnitude of historical revisions to fiscal statistics on a regular basis, but only for internal use. The General Directorate of Statistics produces analyses on the magnitude, characteristics and technical reasons of changes in source data that give rise to revisions on fiscal aggregates. Such investigations are used to improve compilation practices and quality of fiscal statistics, but are not made public. Making these studies public and introducing a short section on historical revisions in the quarterly fiscal reports would represent initial steps towards improved practice.

1.4.1. Statistical Integrity

Good

33. Fiscal statistics are produced and disseminated by the SHCP in line with the IMF’s Special Data Dissemination Standard (SDDS) practices. Mexico subscribed to the SDDS in 1996 and, met all SDDS requirements in 2000, and has been complying with dissemination policies since the time of subscription. The fiscal data disseminated under SDDS framework is the same set of information compiled and published by SHCP on the regular fiscal reports, on monthly and quarterly basis.

34. SHCP has the legal mandate to produce and disseminate fiscal statistics. Such mandate was granted by articles 106 to 109 of the LFPRH, that define the scope of fiscal information to be submitted to Congress and disclosed to public. The SHCP’s General Directorate of Statistics consolidates data provided by various data-producing units (debt, revenue, budget, etc.) and composes the fiscal statistics and reports. This is an important institutional arrangement to prevent multiplicity of agencies disseminating fiscal data.

35. SHCP submitted fiscal data to the IMF’s GFS Yearbook using the GFSM 2014 reporting format for the first time in the beginning of 2018, but with no major methodological changes. Although using the same original cash-based data, SHCP conducted a valuable effort in classifying the institutional units into the GFSM defined sectors and subsectors. The exercise also included subnational finances in the compilation process in order to produce statistics for the consolidated general government. This initiative is a welcome preliminary step in migrating to more advanced statistics standards. Mexico should set up a migration plan to gradually adopt the GFSM 2014 and IPSAS (including accrual accounting practices) to allow for more comprehensive fiscal analysis and evaluation of fiscal policies.

1.4.2. External Audit

Basic

36. Auditoria Superior de la Federación – ASF – is the supreme audit institution in charge of auditing the federal government’s financial statements. Its mandate is regulated by articles 74 and 79 of the constitution, which ensures its technical and managerial independence from the government. The Auditor General is appointed by the legislative branch. ASF undertakes financial audits of fiscal statements in accordance with the International Standards of Supreme Audit Institutions (ISSAI) and reports the audit results to a surveillance commission of the chamber of deputies.

37. ASF has traditionally conducted operational and financial auditing at an individual basis in every public entity. It has a mandate to conduct individual auditing process in almost all kinds of public entities, including central government units, parastatals, and funds. More recently ASF started auditing subnational governments and its corresponding public bodies. Financial auditing of the Cuenta Pública, as a whole, started in 2012. However, its enforcement power and prerogatives to apply sanctions on noncompliance could be strengthened, since several disclaimers and adverse opinions over the last years have not produced strong improvements in the accounts to date.

38. ASF has been conducting financial audits on annual accounts since 2012, issuing 4 disclaimers and 1 adverse (2013) opinion in the period 2012-2016. Their findings reveal a number of concerns such as : (i) there are limited accounting records for non-financial assets and corresponding depreciation, PPP arrangements, and contingent liabilities; (ii) the information presented in the financial statements is not fully harmonized among public entities, which reveal inconsistencies on debtor-creditor records, and non-compliance with reporting requirements by several entities providing financial information; (iii) other obligations such as PPP-related liabilities are not disclosed; and (iv) pension liabilities are not registered. There are limited findings related to financial auditing to subnational governments since the ASF was granted powers to audit them only in 2017. Nevertheless, ASF has raised concerns on the reliability of fiscal data reported by states and municipalities given that initial audits suggested that half of the 32 Mexican states were registering fiscal deficits while the publicly available information on INEGI’s data set shows a few states on fiscal deficit in the 2016 fiscal year. Furthermore, the ASF has issued a number of recommendations to strengthen the measurement of the fiscal position, the fiscal revenues and expenditures, the public sector financing, the public spending and the public debt at subnational level.

1.4.3. Comparability of Fiscal Data

Good

39. Fiscal statistics and forecasts adopt the budget structure in terms of the coverage and economic classification. The main data source used to prepare fiscal reports in Mexico is the budget execution data. Therefore, the fiscal tables are presented on the same basis as the budget, with the same economic and administrative classifications. The economic classification of expenditure is based on a two-tier codification system, expenditure type (clasificador por tipo de gasto) and expenditure object (clasificador por objeto de gasto); the former distinguishes between current and capital expenditure, as well as programmable and non-programmable, while the latter classifies the expenditure by nine economic categories³⁶ (payroll, transfers, general services, etc.). Fiscal forecasts are also presented on the same basis as the budget.

40. Final accounts have a different classification framework, and there is no reconciliation of main aggregates. The financial statements are distinct in coverage, basis of recording, and classification of revenues and expenses. Therefore, accounting and budget execution figures differ, but there is inadequate information on how to reconcile those numbers on the notes to the statements or the budget outturn documents.

41. The publication of fiscal data in line with the GSFM 2014 presentation should be accompanied by bridging tables to allow for reconciliation with the budget and traditional fiscal statistics. SHCP have prepared bridging tables to map the traditional fiscal data to the GFSM 2014 economic categories and submitted the converted data to the IMF’s statistics department in the beginning of 2018. In case this data is published, it should be accompanied by the corresponding bridging tables in order to ensure reconciliation of the new set of statistics with the previous one. This would require an eventual reassessment of this rating.³⁷

2.1.1. Budget Unity

Basic

48. The coverage and structure of the federal budget is much broader and more complex than in many other countries, but not all extra-budgetary units are included in the budget documentation. In addition to ministries and other spending entities (“budgetary central government”), the budget includes two large state public corporations (PEMEX and CFE), and two social security funds. Except for PEMEX, whose transactions with the budget are shown on a net basis, flows within the federal budget are recorded on a gross basis. There are 119 extra-budgetary units⁴⁴ (EBUs) which are outside the perimeter of the budget, but information on the revenues, spending and financing of each unit is included in the budget documents. Some of these entities have a commercial orientation and should be properly classified as public corporations (see Section 3.3.2). The revenues and expenditure of these entities represent around 6 percent of the federal budget (Table 2.1). In addition, more than 246 federal trust funds⁴⁵ make transactions largely outside the budget. The net worth of these entities (including those belonging to sub-national governments) is estimated at about 2.7 percent of GDP (see Section 3.2.2). Information on transfers from the budget relating to trust funds, expenditure by them, and their balances of available funds is published in the SHCP’s quarterly reports. The main area of improvement would be to publish additional information on the execution of their budgets.⁴⁶

Table 2.1.

Spending and Own-Revenues of Extra-Budgetary Units (percent)

Source: SHCP, and FAD staff.

Table 2.1.

Spending and Own-Revenues of Extra-Budgetary Units (percent)

Number of EBUs = 119	2015	2016
Spending by EBUs as a ratio of total Federal Budget expenditure	5.8	6.2
Own-revenues of EBUs as a ratio of total Federal Budget revenues	1.8	1.7
Budget transfers to EBUs as a ratio of EBUs’ total revenues	67.0	66.2

Source: SHCP, and FAD staff.

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Table 2.1.

Spending and Own-Revenues of Extra-Budgetary Units (percent)

Number of EBUs = 119	2015	2016
Spending by EBUs as a ratio of total Federal Budget expenditure	5.8	6.2
Own-revenues of EBUs as a ratio of total Federal Budget revenues	1.8	1.7
Budget transfers to EBUs as a ratio of EBUs’ total revenues	67.0	66.2

Source: SHCP, and FAD staff.

49. Figure 2.1 illustrates the more relevant flows between the federal budget and other public-sector entities in 2016. Transfers to subnational governments amounted to MXN 1,724 billion, mainly driven by revenue earmarking mechanisms. The two major social security institutions/funds, IMSS and ISSSTE, received MXN 491 billion to finance ordinary pension payments, while PEMEX and CFE received transfers of MXN 184 billion and MXN 161 billion respectively as a once-for-all compensation for the pension reform implemented in 2015. In addition, the CFE was paid MXN 30 billion in subsidies for electricity prices. Decentralized agencies (extra-budgetary entities, commissions, and hospitals, among others) received MNX 199 billion to finance their operations beyond the level of their own revenue. The more complex part of the system stands for the FMP stabilization mechanism (see Section 4.4). In 2016, FMP collected MNX 380 billion from the oil sector and transferred it to the budget, which allocated the resources accordingly. Another part was redirected to states and municipalities through the FEIP and FEIEF trust funds.

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Relationship Between the Budget and the Wider Public Sector, 2016

(MXN billion)

Citation: IMF Staff Country Reports 2018, 289; 10.5089/9781484379820.002.A001

Sources: SHCP, Quarterly Reports, Cuenta Pública 2016, and FAD staff estimates.Note: Banxico: Banco de Mexico (Central Bank); FMP: Fondo Mexicano de Petroleo (Mexican Petroleum Fund); FEIP: Fondo de Estabilización de Ingresos Presupuestarios (Budget Revenue Stabilization Fund); FEIEF: Fondo de Estabilización de Ingresos de Entidades Federativas (Subnational Revenue Stabilization Fund); FIES: Fondo para el Fomento de la Investigación Económica y Social (Fund for Economic and Social Research).

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2.1.2 Macroeconomic forecasts

Good

50. The SCHP prepares forecasts of the main macroeconomic variables and their underlying assumptions. It publishes two reports that cover macroeconomic forecasts—a “Pre-Criteria” report (in April) and a General Economic Policy Criteria (GEPC) report (in September).

• The “Pre-Criteria” report covers the previous, current and next fiscal year, but includes no medium-term projections. It provides an overview of the external environment and describes the broad assumptions made in preparing forecasts of the key macroeconomic variables such as GDP, inflation, the oil price, interest rates, and the current account. There is a discussion of the underlying drivers of each of the components of GDP, fiscal and monetary policy developments, and government financing needs. The report also includes projections of the key fiscal variables—revenues, expenditures, planned borrowing and debt. It is submitted to the Congress by April 1.

• The General Economic Policy Criteria (GEPC) report provides a medium-term forecast of key macroeconomic variables, as well as a wider review of economic and fiscal developments. The report is part of the package of budget documents presented to the Congress by September 8. It provides updated projections for the current and next fiscal year as well as forecasts for the following five years. The explanations accompanying the medium-term forecasts and their key drivers, are considerably less detailed than the forecasts for the next fiscal year. The medium-term macroeconomic forecasts would be improved by including, for example, a more complete analysis of the main components of GDP (agriculture, industry, services, etc.), and their contribution to GDP growth, and more detailed projections of expenditure and revenue components.

51. The accuracy of macroeconomic forecasts in Mexico could be improved. When actual and projected data are compared (Figure 2.2), nominal GDP forecast is relatively accurate, except for a few outlier years. However, projections of real GDP growth and inflation show significant deviations from the outturns (Table 2.2 and Figure 2.3).⁴⁷ Over the last 7 years the average absolute deviation in the real GDP forecast one year ahead has been 1.2 percentage points of GDP, ranging from underestimation of 2.1 percentage points in 2010 to an overestimation of the same magnitude in 2013. Since the economic downturn in 2013, successive forecasts have predicted a recovery in real GDP growth rates that did not materialize. As for inflation, during 2010-2017, except 2015, the forecast has always been lower than actual, with an average absolute deviation of 0.8 percentage points (Figure 2.4)⁴⁸. The credibility of forecasts could be enhanced by taking more account of independent forecasts (see Section 2.4.1) and by analyzing forecast deviations and preparing reconciliation tables (see Section 2.4.3).

Table 2.2.

Mexico: Macroeconomic Assumptions: Differences Between Budget Forecasts and Outturns, 2010–2016

Source: SHCP.

Table 2.2.

Mexico: Macroeconomic Assumptions: Differences Between Budget Forecasts and Outturns, 2010–2016

	2010	2011	2012	2013	2014	2015	2016	Average	Average of absolute values
Real GDP growth (in percent of GDP)	-2.1	-0.2	-0.5	2.1	1.2	1.1	1.0	0.4	1.2
Inflation (in absolute terms)	-1.2	-0.8	-0.6	-1.0	-1.1	0.9	-0.4	-0.6	0.8

Source: SHCP.

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Table 2.2.

Mexico: Macroeconomic Assumptions: Differences Between Budget Forecasts and Outturns, 2010–2016

	2010	2011	2012	2013	2014	2015	2016	Average	Average of absolute values
Real GDP growth (in percent of GDP)	-2.1	-0.2	-0.5	2.1	1.2	1.1	1.0	0.4	1.2
Inflation (in absolute terms)	-1.2	-0.8	-0.6	-1.0	-1.1	0.9	-0.4	-0.6	0.8

Source: SHCP.

Forecast Accuracy

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Forecasts and Observed Nominal GDP (Percent of GDP)

Citation: IMF Staff Country Reports 2018, 289; 10.5089/9781484379820.002.A001

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Forecast and Observed Real GDP Growth (Percent of GDP)

Citation: IMF Staff Country Reports 2018, 289; 10.5089/9781484379820.002.A001

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Forecast and Observed Inflation (Percent)

Citation: IMF Staff Country Reports 2018, 289; 10.5089/9781484379820.002.A001

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Source: SHCP Note: These charts present an overview of different vintages of forecasts compared to actual outturns.

2.1.3. Medium-Term Budget Framework (MTBF)

Basic

52. Mexico prepares and publishes a medium-term fiscal framework (MTFF) but the development of a medium-term budget framework (MTBF) is rudimentary. An MTBF provides a bridge between a country’s fiscal strategy (MTFF) and the budget, a process for setting expenditure ceilings at the ministerial and program level for coming fiscal year and three or four additional years, and for making reliable forward projections of spending (see Box 2.1). One of the documents presented with the budget is the General Economic Policy Criteria for the Annual Revenue Law and the Expenditure Budget Law (GEPC).⁴⁹ This report includes projections of key macro-economic and fiscal variables for the upcoming budget year (2018 in the most recent case) and over the medium term (2019-2023).⁵⁰ Additionally, it includes a table showing medium-term projections of expenditure by economic category, but at a highly aggregated level. However, the report includes only limited data on the outturns of key macroeconomic and fiscal indicators for the two preceding fiscal years. A comparison of successive vintages of the projections published in the GEPC shows that in many years there have been substantial variations between the forecasts of aggregate revenue and expenditure and the outturns (Figures 2.5. and 2.6.).

Revenue and Expenditure Forecasts

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Forecasts and Observed Revenues (% of GDP)

Citation: IMF Staff Country Reports 2018, 289; 10.5089/9781484379820.002.A001

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Forecasts and Observed Spending (%of GDP)

Citation: IMF Staff Country Reports 2018, 289; 10.5089/9781484379820.002.A001

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Source: the SHCP

53. Mexico’s current procedures for preparing the budget include some features of an MTBF, but there are also substantial gaps compared to the models used in advanced countries and some emerging markets. Key features of an advanced MTBF that are currently lacking in Mexico include expenditure ceilings for the three out-years of the MTBF; an integrated process for preparing the annual budget and the MTBF; separations of the cost of existing policies (spending baselines) and new policy proposals; a process for making reliable forward estimates of spending over the medium term; the use of planning margins or planning reserves in allocating resources; and carrying forward defined categories of spending (e.g., capital investment) from one fiscal year to the next (see Table 2.3).

Table 2.3.

MTBF: Differences Between Practices in Mexico and Advanced Model

Source: FAD staff

¹ Some advanced countries have adopted a fixed framework for the MTBF, i.e., one that is only changed at the end of the 3-4-year period.

² Some advanced countries have binding ceilings for the out-years, e.g., Sweden, U.K. (partially).

Table 2.3.

MTBF: Differences Between Practices in Mexico and Advanced Model

MTBF Characteristics	Mexico	Advanced
3 to 5-year medium-term fiscal framework	Yes	Yes
Indicative expenditure ceilings for the out-years	No	Yes1
Alignment of budget projections with government’s fiscal policy objectives and macroeconomic forecasts	Yes	Yes
Spending estimates for out-years rolled over from one MTBF to the next	No	Yes2
Fully integrated budget preparation process for capital and recurrent spending	Yes	Yes
Classification of expenditure and revenue aligned with international standards	No	Yes
A single process for preparing MTBF and annual budget, and fully integrated documentation	No	Yes
Separating out the cost of existing policy (spending baselines) and new policy proposals	No	Yes
Reliable forward estimates of spending in out-years	No	Yes
Planning margins or planning reserves used to allocate budget appropriations	No	Yes
Carry forward of spending from one year to the next, within well-defined limits	No	Yes

Source: FAD staff

¹ Some advanced countries have adopted a fixed framework for the MTBF, i.e., one that is only changed at the end of the 3-4-year period.

² Some advanced countries have binding ceilings for the out-years, e.g., Sweden, U.K. (partially).

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Table 2.3.

MTBF: Differences Between Practices in Mexico and Advanced Model

MTBF Characteristics	Mexico	Advanced
3 to 5-year medium-term fiscal framework	Yes	Yes
Indicative expenditure ceilings for the out-years	No	Yes1
Alignment of budget projections with government’s fiscal policy objectives and macroeconomic forecasts	Yes	Yes
Spending estimates for out-years rolled over from one MTBF to the next	No	Yes2
Fully integrated budget preparation process for capital and recurrent spending	Yes	Yes
Classification of expenditure and revenue aligned with international standards	No	Yes
A single process for preparing MTBF and annual budget, and fully integrated documentation	No	Yes
Separating out the cost of existing policy (spending baselines) and new policy proposals	No	Yes
Reliable forward estimates of spending in out-years	No	Yes
Planning margins or planning reserves used to allocate budget appropriations	No	Yes
Carry forward of spending from one year to the next, within well-defined limits	No	Yes

Source: FAD staff

¹ Some advanced countries have adopted a fixed framework for the MTBF, i.e., one that is only changed at the end of the 3-4-year period.

² Some advanced countries have binding ceilings for the out-years, e.g., Sweden, U.K. (partially).

2.1.4 Investment projects

Good

54. The annual budget proposal includes the total cost of all multi-annual investment projects. For each budget entity, a list of investment projects is shown with the following information: (i) an estimate of total project costs which is updated annually; (ii) cumulative actual spending on the project during the period of construction; (iii) the appropriation for the upcoming budget year; and (iv) estimated remaining project costs after the budget year. Operational and maintenance costs are not included in the estimate of a project’s total investment cost. The budget documentation also includes information on multi-annual commitments for which the authorization by the Congress is sought.

55. The share of public investment to GDP in Mexico has been relatively low since 2000s compared to both emerging market economies and countries in Latin America and Caribbean (see Figure 2.7 and 2.8). At the end of 1990s, annual public investment dropped significantly and reached the low level of 3.4 percent of GDP in 2015. In the last few years public investment has been compressed further to achieve the deficit target set under the government’s fiscal consolidation plan (see Section 2.3.1). The overall level of public investment is projected to fall to 2.6 percent of GDP in 2018⁵¹.

Public Investment

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Public Investment in Mexico Compared to Emerging Market Economies (2011 PPP$ Adjusted, % of GDP)

Citation: IMF Staff Country Reports 2018, 289; 10.5089/9781484379820.002.A001

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Public Investment in Mexico Compared to Latin America and Caribbean (2011 PPP$ Adjusted, % of GDP)

Citation: IMF Staff Country Reports 2018, 289; 10.5089/9781484379820.002.A001

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Source: IMF PIMA database

56. All public investment projects are subject to a cost-benefit analysis or cost-effectiveness analysis⁵², which is made public before a project is approved. The Budget and Fiscal Responsibility Law (BFRL) includes provisions regarding public investment management (Articles 32 and 34).⁵³ The SHCP has also issued numerous guidelines on public investment management, including on the preparation and presentation of cost-benefit analysis, which may take different forms depending on the type of project and its size. The Investment Unit in the SHCP carries out a validation of the project documentation and the cost-benefit analysis, before registering the projects in the database. The cost-benefit analysis for all projects—approved and in the pipeline—is published on the SHCP’s website⁵⁴ along with other project-related information.

57. Legislation requires major projects to be tendered competitively. Under the procurement law and public works law⁵⁵, the Ministry of Public Administration is responsible for the management and oversight of public procurement. The procurement and public works regulations provide for exceptions to public bidding for investment projects below a threshold,⁵⁶ as well as certain exceptions are also included in the law. All information regarding individual projects and procurements processes are available on two web portals – Transparency Portal and CompraNet.

58. The law and regulations define an open and competitive tender as a preferred method. However, the regulations also provide for many exemptions.⁵⁷ The agencies need to demonstrate that exceptions will ensure the best contracting conditions and administrative liability procedures are in place for deviating from the rules.⁵⁸ Overall, about 70 percent of the total amount contracted in 2016 and 2017 was through public tenders, while 30 percent were contracted by direct awards and/or restricted tenders (Table 2.4). Audits conducted by the Mexican Supreme Audit Institution (Auditoría Superior de la Federación) show that some major projects were contracted through exceptions to public tenders (which is allowed by Mexican Regulations regarding public procurement); that not all contracts are registered in the CompraNet web portal;⁵⁹ that there are cases where tenders are split in order to avoid the open procurement procedure; and that there are cases where exemptions are used inappropriately to allow restricted tenders or direct award instead of public tender.⁶⁰

Table 2.4.

Total Number and Value of Contracts Above the Maximum Threshold

Source: Compranet and Annual Budget Decrees.

Table 2.4.

Total Number and Value of Contracts Above the Maximum Threshold

	2016				2017
Procurement method	No of contracts	% of total	Value of contracts (mln pesos)	% of total	No of contracts	% of total	Value of contracts (mln pesos)	% of total
Direct award	1620	26%	79,607	25%	1666	30%	105,260	23%
Restricted tender	554	9%	18,926	6%	427	8%	25,682	6%
Public tender	3993	64%	222,062	68%	3378	62%	320,798	71%
Other	40	1%	2,976	1%	15	0%	469	0%
Total	6207	100%	323,571	100%	5486	100%	452,209	100%

Source: Compranet and Annual Budget Decrees.

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Table 2.4.

Total Number and Value of Contracts Above the Maximum Threshold

	2016				2017
Procurement method	No of contracts	% of total	Value of contracts (mln pesos)	% of total	No of contracts	% of total	Value of contracts (mln pesos)	% of total
Direct award	1620	26%	79,607	25%	1666	30%	105,260	23%
Restricted tender	554	9%	18,926	6%	427	8%	25,682	6%
Public tender	3993	64%	222,062	68%	3378	62%	320,798	71%
Other	40	1%	2,976	1%	15	0%	469	0%
Total	6207	100%	323,571	100%	5486	100%	452,209	100%

Source: Compranet and Annual Budget Decrees.

2.2.1 Fiscal Legislation

Advanced

59. The legal framework for budgeting and fiscal management in Mexico is comprehensive and clear. The Constitution includes several articles on public finance and the budget process, and a definition of the role of the executive branch and the Chamber of Deputies in approving the annual budget (notably Articles 73 and 74). The Constitution is supplemented by several laws and regulations on public finance and budgeting, notably the Budget and Fiscal Responsibility Law (BFRL, 2006, revised 2015), the General Accounting Law (2008), as well as laws on public debt management and public procurement. This framework covers all aspects of budgeting, fiscal transparency, and fiscal reporting, as well as many aspects of fiscal risk management, including PPPs for example.

60. The legal framework sets out inter alia a clear timetable for budget preparation and approval, which has been regularly complied with in recent years (see Section 2.2.2). It also defines the key content requirements of the budget, the role of the SHCP and the President⁶¹, and the powers of the Chamber of Deputies’ to make amendments to the draft budget.⁶² In law, the power of the Chamber to amend the budget are unlimited. But in practice, the Chamber is constrained by several factors: (i) it cannot deny funding for expenditures that the executive is legally or constitutionally compelled to make, such as federal transfers and entitlement spending; (ii) it can increase expenditures only if additional sources of financing are identified; and (iii) it must comply with the fiscal targets and rules set out in the BFRL (see Section 2.3.1). However, the Congress also approves a revenue law prior its deliberations on the expenditure budget, and generally increases the (typically conservative) revenue estimates submitted by the government to create space for additional spending. Amendments made by the Chamber of Deputies to the draft budget in recent years have averaged around 4-5 percent of the approved budget, and have been focused mainly on investment projects, and environmental and social programs. As a quid pro quo, the executive has full authority to make in-year adjustments to the budget allocations, without the approval of Congress (see Section 2.4.2).

2.2.2 Timeliness of Budget Documents

Advanced

61. The legal framework includes specific deadlines on the preparation and approval of the budget that have been fully respected in recent years. As shown in Table 2.5, the draft budget must be submitted to the Chamber of Deputies in early September, nearly four months before the start of the fiscal year, and must be approved and published by November 15. These statutory deadlines have been complied with without exception in recent years. The budgets for 2016, 2017, and 2018 were approved by the Chamber between November 11 and November 13 in the previous year; and were published between November 27 and November 30. The revenue budgets were submitted on September 8, and approved between October 26-29 in each of these years.

62. The main forum for budget analysis and debate in the Chamber is the all-party Budget Committee. The budget is reviewed by the Chamber of Deputies’ sectoral committees, which submit proposals for amendments to the Budget Committee, before the budget is debated and approved by the whole Chamber in plenary session. The Budget Committee invite targeted sub-groups to their hearings on the budget and take evidence from a variety of sources, such as academic institutions, business and civil society groups (see Section 2.3.3), representatives of line ministries and sub-national governments. Consultations with the SHCP take place throughout Chamber’s deliberations. The draft budget is also reviewed by the Center for Public Finance Studies (CEFP), a technical advisory body attached to the Chamber of Deputies (see Section 2.4.1).

Table 2.5.

Calendar for Submission and Approval of the Budget

Source. SHCP, FAD staff

Table 2.5.

Calendar for Submission and Approval of the Budget

Date	Event
April 1	The executive submits the Pre-criteria report for the next fiscal year to the Congress
June and July	Ministries start drafting their budget submissions
July	The SHCP sets the aggregate ceiling for the budget and circulates the annual guidelines to ministries
August 11-22	Ministries submit their budgets to the SHCP
August 25	The SHCP integrates the draft budget
September 8	The executive submits the draft budget to the Chamber of Deputies
October 31	The Budget Committee receives comments from the sectoral committees on proposed amendments, and submits the budget to the plenary
November 15	The Chamber of Deputies approves the budget
Second half of November	Publication of the budget
January 1	The fiscal year begins

Source. SHCP, FAD staff

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Table 2.5.

Calendar for Submission and Approval of the Budget

Date	Event
April 1	The executive submits the Pre-criteria report for the next fiscal year to the Congress
June and July	Ministries start drafting their budget submissions
July	The SHCP sets the aggregate ceiling for the budget and circulates the annual guidelines to ministries
August 11-22	Ministries submit their budgets to the SHCP
August 25	The SHCP integrates the draft budget
September 8	The executive submits the draft budget to the Chamber of Deputies
October 31	The Budget Committee receives comments from the sectoral committees on proposed amendments, and submits the budget to the plenary
November 15	The Chamber of Deputies approves the budget
Second half of November	Publication of the budget
January 1	The fiscal year begins

Source. SHCP, FAD staff

2.3.1 Fiscal Policy Objectives

Advanced

63. The framework of fiscal policy objectives and fiscal rules in Mexico is precise and clear. It has evolved since the mid-2000s. The BFRL, enacted in 2006, aimed at locking in the low fiscal deficits that characterized fiscal performance prior to the Mexico’s economic crisis in the mid-1990s. It did so by introducing a zero-balance target on the fiscal deficit.

64. Important modifications were made to the fiscal rule in 2014, to support the government’s newly-established Fiscal Consolidation Plan, which set a target of reducing the budget balance to zero by 2017 (later amended to 2018). These amendments to the BFRL added two additional fiscal rules to the existing deficit rule, which was retained: (i) the public sector borrowing requirement (PSBR) was introduced as a target to limit the pro-cyclicality of the deficit rule, though a specific ceiling for the PSBR is not specified; and (ii) a cap on the real rate of growth of structural current spending,⁶³ equal to potential output growth which is currently estimated at 2.5 percent a year, was also introduced. Another change was to allow up to 2 percent of capital investment by PEMEX, CFE, and other “high impact” economic and social investment to be discounted from the budget balance rule. In addition, the amendments changed the way oil revenues are managed. Starting in 2015, a new sovereign wealth fund, the Mexican Oil Fund, manages all hydrocarbon-related wealth, which should help better insulate public spending from transitory fluctuations in oil revenues (see Section 4.4).

65. Article 17 of the BFRL allows for ex ante deviations from the fiscal balance rule under exceptional circumstances. The regulations to this law (Article 11) include five specific triggers which are related to exceptional changes in economic circumstances, a revenue shock, or natural disasters.⁶⁴ These regulations also allow the deficit to be increased if the government introduces a new policy which incurs short-term fiscal costs but which yields net fiscal benefits over the long-term. The provisions have only been triggered once, in 2014, following a sharp decline in the economy.

66. Procedures for reporting on compliance with pre-defined fiscal targets and objectives are reasonably well developed. The SHCP’s General Economic Policy Criteria (GEPC) report, published in September when the budget is submitted to the Chamber of Deputies, includes sections on prospects for public finances in the short term and medium term, and a discussion of the government’s compliance with the Fiscal Consolidation Plan, and with the fiscal rules noted above. A similar assessment is provided in the Pre- Criteria Report published each April (though this document focuses only on the forthcoming fiscal year).⁶⁵ The quarterly reports on budget execution include a summarized assessment of fiscal policy and note any adjustments in budget allocations that have made to support the government’s fiscal consolidation policies. In addition, the government publishes monthly and in the SHCP’s quarterly reports information on 12 fiscal indicators⁶⁶ that provide a broad picture of developments in public finance. A simplified presentation of public finance trends and developments is also published in the Citizen’s Guide to the Budget (see Section 2.3.3).

67. The authorities could consider developing its Pre-Criteria Report into a medium-term fiscal strategy report, issued early in the budget cycle. Such a report would include a full discussion of fiscal policy objectives and targets, in the medium-term context, together with an assessment of compliance with the fiscal rules, the need for further fiscal consolidation, and the sustainability of public finances. Many advanced countries and emerging markets publish similar reports. In some countries, the fiscal strategy document is discussed with the cabinet and the legislature, thus helping to align expectations on the need for further fiscal consolidation. It can also be used to set preliminary ceilings for spending at the sectoral and ministerial level, thus providing a bridge to the detailed expenditure allocations proposed in the draft budget law.

2.3.2 Performance Information

Advanced

68. A comprehensive performance information system has been established at the federal level in Mexico. The system includes extensive data on the inputs, outputs, and outcomes of government spending programs, procedures for analyzing and monitoring this information, as well as a framework for evaluating programs and projects. The fully-automated system was designed and is managed by a dedicated unit in the SHCP, with support from the National Evaluation Council for Social Development Policy (CONEVAL) on social development programs⁶⁷. Much of the information is published on the SHCP’s Transparency Portal.⁶⁸

69. The design of the performance information system follows closely the structure of sectors, ministries, and programs that is laid down in Mexico’s National Development Plan and the associated sectoral plans. This design is based largely on the programmatic structure of the budget, which currently includes 658 programs at the federal level. About 100 of these programs relate to social development and are overseen by CONEVAL. Nearly 5,000 performance indicators have been defined, of which 2,000 are “strategic” and outcome-based, while the remainder are output-based. Targets are set for most of the indicators, some for a single year, others (including most of the strategic indicators) for several years. The number of performance indicators and targets is greatly in excess of those used in other OECD countries: for example, France, New Zealand, the United Kingdom, and the federal government of the U.S.A., which take a more strategic approach to performance budgeting, whereas Mexico takes both the strategic and operational approaches.

70. The budget documentation includes an annex with details of performance indicators and targets for all the 658 programs covered by the system. Summary information is also included in the SHCP’s quarterly reports on budget execution. The SHCP has developed a “traffic lights” system which assesses and monitors both the quality and relevance of the indicators included in the system, and the progress made by spending entities in meeting their performance targets. Performance information, however, is used to only a limited extent in the policy-making process. A recent World Bank study concluded that there is little evidence that performance information is directly linked to the budget cycle, and that the use or performance information and performance evaluations varies considerably from one ministry to another.⁶⁹

2.3.3 Public participation

Good

71. Mexico has adopted several laws aimed at improving transparency and public participation the preparation of the budget.⁷⁰ These laws require more budgetary and fiscal information to be published by the government, and established two new vehicles for the public disseminating of such information—the Citizen’s Guide to the Budget, and the Transparency Portal.

72. The Citizen’s Guide to the Budget has been published every year since 2010. It provides an accessible description of (i) recent fiscal performance and economic prospects; (ii) the main budgetary revenues and expenditures; and (iii) the impact of the budget on the typical citizen. The focus of the guide is driven by the reforms undertaken by the government. For example, in 2014, the Guide focused heavily on the government’s tax reform and its implications for citizens. The Guide does not usually provide an assessment of the implications of the budget for different demographic groups—for example, programs aimed at the poor and vulnerable, food insecurity, or regional imbalances—but such information is provided in the Transparency Portal. Separate issues of the Citizen’s Guide cover the Federal Budget Proposal, the Annual Financial Statements and, from 2018, the SHCP’s quarterly reports. Since 2018, the Guides are published only on SHCP’s website. The SHCP has also developed jointly with civil society organizations a four-week online course on “How to Understand the Budget”.

73. The Transparency Portal (Transparencia Presupuestaria) was launched in July 2011. The portal was the government’s response to the increasing demands of citizens and civil society organizations to have a more transparent and effective system of public budgeting. In its first year of operation, the portal had 34,500 visits, but usage increased to nearly 900,000 visits in 2017. The Performance Evaluation Unit in the SHCP plays a key role in increasing the quantity and quality of budget information made widely available on the portal.

74. The authorities provide the public with relatively limited opportunities to engage in the budget preparation and execution process. Some ministries invite the public to send their opinions through the print media or websites on proposals for new policies or programs, and conduct surveys to assess citizens’ satisfaction with the implementation of the policies.⁷¹ Civil society organizations also participate in sector planning discussions led by sectors or line ministries, but the engagement varies by sector. The Congress also seeks views of the public on the annual budget proposals (see Section 2.2.2), but there is no formal requirement for such consultations, and public hearings are often targeted at certain lobby groups and are not open to the wider public. The plenary sessions of the Congress are broadcast live on the TV. The moderate level of public engagement in budgetary issues is reflected in Mexico’s score of 44 out of 100 in the 2016 version of the World Bank’s Voice and Accountability Index, and its score of 39 out of 100 in the 2017 OBI index of public participation (Figure 2.9).⁷²

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OBI Index on Public Participation, 2017

Citation: IMF Staff Country Reports 2018, 289; 10.5089/9781484379820.002.A001

Source: OBI database

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2.4.1 Independent evaluation

Not Met

75. The SHCP’s two main reports on economic and fiscal policy,⁷³ published in April and September each year, provide little information on the views of other forecasters on economic developments, or their economic and fiscal projections. In preparing its macro-fiscal forecasts, the SHCP, takes account of the forecasts prepared by organizations such as the Bank of Mexico, Blue Chip, the IMF, and the World Bank, and holds meetings with the chief economists of rating agencies, research institutes, and major domestic banks. The SHCP also attends quarterly meetings of the Financial Stability Committee at the Bank of Mexico which discusses fiscal risks and the economic outlook. However, reports published by the SHCP include virtually no information on these alternative assessments and forecasts. Such comparisons could improve the accuracy of macroeconomic forecasts, and reduce the variability in the short- and medium-term projections of revenue and expenditure (see Section 2.1.2).

76. The SHCP’s macroeconomic and fiscal forecasts are analyzed by the Center for Public Finance Studies (CEFP), which is a technical support unit attached to the Chamber of Deputies. A similar unit—the Belasario Dominguez Institute (BDI)—provides support to the Senate. The CEFP has a legal base in the FRBL, and is independent of the executive.⁷⁴ The Congress is responsible for the appointment of the Director of the CEFP and approving the Centre’s annual work program. The Center analyzes the documents that are part of the executive’s annual budget proposal, as well as the quarterly reports and annual reports presented by the executive. In addition, it prepares estimates of the budgetary impact of proposed legislation, and publishes studies on topics in public finance, a monthly news bulletin and its own Journal of Public Finance.

77. While the CEFP and BDI analyze the executive’s economic and fiscal forecasts, they do not assess the credibility of these forecasts.⁷⁵ Nor do they review the government’s performance in achieving its fiscal objectives and targets, or its compliance with the fiscal rules set out in the FRBL. Nevertheless, the CEFP and BDI play a useful role in synthesizing and simplifying the information on public finance that is presented to the Congress and Senate, as well informing the public, since the notes and studies prepared by these two entities are published on their websites. In addition, another independent oversight entity, the federal audit agency (ASF) provides in its annual report a formal assessment of the government’s fiscal performance and its compliance with the fiscal targets/rules in their annual report.

2.4.2 Supplementary budget

Basic

78. Legal framework allows the executive to spend more than the approved budget and then report to the Chamber of Deputies. Both the quarterly reports and the annual financial statements provide information on the main changes, but no ex-ante or ex-post approval by the legislature is required. The FBRL sets out the following rules and procedures that govern in-year changes to the budget:

• Article 19 establishes that the SHCP can authorize additional expenditures if there is a surplus of revenues. The SHCP must inform the Chamber of Deputies in its quarterly reports and annual financial statements.

• Article 19 provides how the excess revenues should be allocated.⁷⁶ The provisions are fairly complex.

• Article 21 notes the rules of budgetary discipline that the executive must apply when the revenues foreseen in the Revenue Law decrease. Although these provisions reduce the discretion of the executive to adjust spending, they do not indicate that the approval of the legislature is required to implement any cuts in expenditure.

• Article 58 establishes that the executive may make budget adjustments provided they comply with the government’s policy objectives and programs.

79. The executive has considerable discretion to modify the expenditure allocations initially approved by the Chamber of Deputies. Over the past decade, the executed budget has been on average 7 percent higher than the approved budget (Figure 2.10 and 2.11). In all the last ten years the budget outturn has been above the approved budget. In most years, this additional expenditure has been financed by higher than expected revenues (Figure 2.12).

Revisions to the Approved Budget, 2008-2017

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Approved vs Actual Expenditures (%, 2008-2017)

Citation: IMF Staff Country Reports 2018, 289; 10.5089/9781484379820.002.A001

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Approved vs Actual Revenues (%, 2008-2017)

Citation: IMF Staff Country Reports 2018, 289; 10.5089/9781484379820.002.A001

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Revenue and Expenditure Outturns (%, 2008-2017)

Citation: IMF Staff Country Reports 2018, 289; 10.5089/9781484379820.002.A001

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Source: SHCP data

2.4.3 Forecast reconciliation

Not met

80. The budget documentation does not provide any analysis of the differences between successive vintages of macroeconomic and fiscal forecasts.⁷⁷ The GEPC as well as the SHPC’s quarterly reports provide some assessment of why the forecasts of revenue, expenditure and financing included in the previous budgets have deviated from the outturns. However, this analysis does not discuss whether the deviations are related to changes in fiscal policy, variations in macroeconomic conditions, policy changes, or other factors, even when in some cases the differences are considerable (see Sections 2.1.2 and 2.4.2). Including a reconciliation table in budget documents, together with an analysis and explanation of deviations would substantially increase the credibility of the forecasts that underpin the budget.

81. Observed changes can be broadly decomposed into macroeconomic factors, changes in volume and case-load, the impact of discretionary policies, and classification changes. The reconciliation table would:

• Begin with the previous year’s medium-term macroeconomic forecast;

• Adjust for any accounting or classification changes;

• Identify the impact of changes in the baseline macroeconomic forecast, due to variations in economic and demographic parameters;

• Identify the fiscal impact of changes in law or policy decisions taken over the past year, and in the measures included in the budget; and

• Present the latest macroeconomic and fiscal forecasts.