In its 2006 report on fiscal policy transparency, Oxford Analytica (OA) assigns Mexico a rating of "compliance in progress." The report notes improvements in Mexican fiscal transparency and attributes much of this to the approval of the new Federal Law on Budget and Fiscal Responsibility in March 2006, whose primary goal is the enhancement of public oversight of government spending. The law increases the role of parliament in the budget process, while other provisions call for greater public disclosure of the government procurement process, increased public access to financial management information, and greater transparency regarding public services. The new fiscal framework created by the law also sets clearer guidelines according to which unspent allocations and excess oil revenues are to be handled. Furthermore, provisions of the Law imply an expanded role for the Federal Institute for Public Information Access. It also changes reporting practices, once carried out only annually by the Secretariat of Finance and Public Credit. There is now an established schedule of reporting dates on which information must be presented to the legislature. In contrast to this positive assessment by OA, the 2006 Open Budget Index (OBI) points out well-known difficulties in Mexico with respect to the availability of information. The OBI, however, does not reflect the implementation of the new law, and rates Mexico's performance at only 50%, suggesting that much more detail could still be made available in the budget documents, and that there was room for improvement in achieving citizen participation in the budget process.

General Overview

According to the 2006 Oxford Analytica (OA) report on fiscal policy, Mexico has been assigned a rating of "compliance in progress" (p. 299) and has shown improvement in its fiscal policy transparency framework in the preceding year. A significant aspect of this improvement has been the approval of the new Federal Law on Budget and Fiscal Responsibility in March 2006. Five years in the making, the Law has as a primary goal the enhancement of public oversight of government spending. It provides for greater involvement by parliament in the budget process, while other provisions call for greater public disclosure of the government procurement process, increased public access to financial management information, and greater transparency regarding public services. Implicated in the provisions of the Law is an expanded role for the Federal Institute for Public Information Access (IFAI), an organization created in 2002 by provisions of the Federal Law on Transparency and Access to Public Information. The new Law also changes reporting practices, once carried out only annually by the Secretariat of Finance and Public Credit (SHCP). Now, there is an established schedule of reporting dates on which information must be presented to the legislature.

OA adds that the new Law creates a stronger framework according to which unspent allocations and excess revenues are to be handled, reducing the executive's previously broad discretion to spend these funds. According to OA, this, as well as new, strict guidelines on the use of oil revenues, should reduce the size and incidence of "discrepancies between projected and actual revenues and expenditures" (p. 299). The new law allocates the bulk of excess oil revenues to the states, with PEMEX (the state oil company) and the federal government getting a smaller portion. The Law also requires the employment of a rolling five-year quantitative framework as the context for the formulation of the annual budget, replacing the previous practice of publishing a single medium-term fiscal plan at the outset of an administration's term. By approving this new Federal Law, Mexico has added greater clarity to the definition of the budgetary roles and responsibilities of government agencies. It offers a detailed specification of the data that must be provided both to congress and to the public. Overall, then, it represents a substantial improvement in fiscal transparency in Mexico.

In 2004, Fitch Ratings published a report on Monetary and Fiscal Transparency in Mexico. The report is no longer available online, but its conclusions are summarized in an article by Business Wire. The report noted that fewer data gaps remain in monetary policy compared to fiscal policy, but also noted that the Mexican government was attempting to further improve fiscal transparency by closing these information gaps. The results of the 2006 Open Budget Initiative's Open Budget Project compiled by Jorge Romero Leon are noteworthy in this context, as they characterize Mexico's budget process as displaying only "some" openness. The project only awards a score of 50% on the Open Budget Index (OBI) scale of 0 to 100%. The OBI rates the budget processes of some 59 countries according to how many of the seven key budget documents are produced, how many of these documents are publicly available, and how comprehensive the documents are in conveying the necessary information to make informed judgments on the annual budget. Also important is the degree of public participation built into the budget process. The seven documents are: the Pre-Budget Statement, the Executive's Budget Proposal, the Citizen's Budget, In-Year Reports, the Mid-Year Review, the Year-End Report, and the Auditor's Review. According to Leon, Mexico produces and publicly disseminates five of the seven key documents, but does not produce a pre-budget statement or citizen's budget. The Executive's Budget Proposal is not comprehensive enough to give the public an adequate picture of the government's fiscal activity, scoring only 41% on this measure. Similarly, the Mid-Year Review and Year-End Report are found to be less than fully comprehensive. The Auditor's Report could be strengthened by inclusion of information as to recommendations made by the auditors and progress achieved in carrying out those recommendations. Finally, Leon writes that although Mexico does hold public hearings on the budget, there are only "a very limited number of hearings in which the public can participate."

The 2007 IMF Article IV Consultation applauds the 2007 fiscal reforms in Mexico, noting that the tax reforms are likely to provide a broader tax base and generate needed revenues. It also notes that the reforms mean that "transfers to subnational governments -- the basis for a large part of public expenditure -- will be rationalized" (p. 25), and that public spending accountability and efficiency will be enhanced. Reforms to the federal government employee pension system are also noted as positive steps. However, the IMF suggests that Mexico was still likely to face a progressive tightening of the fiscal situation over the medium term, due to declining oil revenues and rising pension costs. This makes it important to move ahead with strengthening the tax administration and exercising caution regarding any new spending commitments. The IMF team notes that it is important to further improve the management of expenditures in order to realize social gains from the recent reform efforts. It applauds the plan to adopt performance budgeting and to improve state and municipal spending accountability. According to the report, "the proposal to empower congress to establish uniform accounting will be a critical step to enhancing subnational accountability, and the team suggested that a portion of federal transfers could be made contingent on meeting basic reporting standards" (p. 28). One step currently in the works is the implementation of a single Treasury Account, which should improve transparency and cash management. While noting that the recent tax reforms are a good initial step, the IMF adds that longer-term fiscal challenges call for more. Specifically, the IMF suggests raising the tax-to-GDP ratio by 10 points or so by the year 2010 to alleviate uncertainty regarding oil revenues. In addition, the IMF recommends that Mexico seek to gradually reduce its non-oil augmented fiscal deficit. It also suggests "that it would be desirable to develop a broader picture of the public finances to help assess longer-term challenges and risks" (p. 31).

The Principles

Clarity of roles and responsibilities.

CP

The 2006 OA report on Mexico's fiscal policy awards a rating of "compliance in progress" (p. 300) for this principle. The 1917 Constitution provides a clear definition of the government structure, allocates roles, responsibilities, and authority regarding policy to the various government agencies involved in fiscal policy, gives the legislative branch the authority to pass laws on federal issues, and defines the tax and spending authority to be allocated to the states. State governments assume responsibility for all issues not covered by the Constitution. OA reports that those areas in which definitional ambiguity exists regarding the three levels of government (federal, state, and municipal) are to be clarified under a "comprehensive fiscal federal program" (p. 300) for 2002-2006. Under this plan, the budget has allocated funds to "strengthen the management procedures and social responsibilities of state and municipal governments" (p. 300). In 2004, the National Fiscal Convention (CNH) set forth recommendations that included performance-based budget assessments and enhanced accountability, with the goal of improving transparency. It also recommended Constitutional reform and fiscally oriented federal legislation designed to greater decentralize revenue collection. OA reports that little has yet been done to implement the CNH recommendations. In particular, the situation in which tax collection is centralized but spending is carried out on the local level has yet to be corrected and the issue is unlikely to be dealt with in the near term.

The effect of the new Federal Law on Budget and Fiscal Responsibility has been to introduce greater clarity in the allocation of budgetary roles and responsibilities among the various government agencies to which fiscal responsibilities attach. As OA notes, "it has formalized and thus strengthened many existing practices, providing explicit mechanisms to ensure fiscal responsibility and transparency" (p. 301), and includes provisions regarding public disclosure for public services, procurement, and financial management. It strengthens parliament's role in the budget process, and enforces a policy of zero deficits. Should a deficit be required, it must be accompanied by a clear justification and a plan to restore budgetary balance within 5 years. The coordinating agency for the federal budget is the SHCP, which the new Law empowers to set standards and spending ceilings, allocate disbursements, and, within legal limits, approve budget amendments. Budget allocations cover "constitutionally autonomous entities, centralized public institutions, entities under direct budgetary control, and transfers to other entities (such as non-financial parastatal entities under indirect budgetary control" (p. 301).

During the administration of Vicente Fox, an issue arose as to the power of the executive to veto the annual budget law -- the situation is not clearly addressed in the Constitution and President Fox successfully vetoed a portion of both the 2004 and 2005 budgets. OA notes that the new law does not clarify this point. It also fails to address procedural issues that may arise during years of executive transition. The zero-deficit provision of the new law requires that all changes in spending be balanced by amendments to tax revenues. Thus, as OA notes, "tax legislation is frequently modified during the budget process" (p. 301). This, however, gives rise to a situation in which tax changes are implemented without a full understanding of how they will impact the economy. The SHCP and Congress are working to address this problem. Provisions in the 2006 Law do address problems arising from the broad discretionary powers previously accorded to the executive in the use of unspent allocations or excess revenues. Although there is little publicly disclosed information about spending discrepancies, the OA report notes that comments from the auditing department are now included in the annual Public Account. In addition, there are now specific penalties for under-spending. The oil-pricing formula has also been clarified, and guidelines are provided for the spending of excess oil revenues, with most of it going to the states (PEMEX and the federal government getting the remainder). The budget process for sub-federal governments have their own budget process and submit their budget proposals to the Congress separate from that of the central government. This is also the case for public financial institutions. However, according to OA, the new Law governs the state-by-state allocation of resources through the SHCP.

OA reports that "the Federal Audit Office (ASF) is an auxiliary entity to the Chamber of Deputies and it has full technical and administrative autonomy over the external supervision of the federal executive branch" (p. 302). The Federal Law on Transparency and Access to Public Information is operationalized through the autonomous activities of the Federal Institute for Public Information Access (IFAI). The banking sector, financial institutions, and securities sector are supervised by the "technically autonomous" National Banking and Securities Commission (CNBV), per the OA report. Concerns about CNBV autonomy, given its financial dependence on the SHCP, are being addressed. OA states that "public financial institutions carry out considerable quasi-fiscal operations" (p. 303), but adds that there has been a move to reduce these in recent years. Whereas the budget does account in detail for certain important government subsidy programs, there is inadequate detail available for subsidies arising from quasi-fiscal activities. Compliance with rules of disclosure in the financial and related sectors is overseen by the CNBV and the Ministry of Public Function. OA reports that "political reasons have prevented the integration into the budget of off-sheet items such as the recognition of [the Bank Savings Protection Unit] debt as public debt" (p. 303).

The new Federal Law, along with related legislation, governs the budget process and fiscal management. The process begins when the executive drafts a revenue law and a budget proposal for Congressional approval. Spending increases in the budget proposal must correspond to revenue increases enabled by the revenue law. OA adds that the new Law "imposes additional requirements for fiscal responsibility, medium-term planning, rules on the redistribution of expenditure and surplus revenues, budgetary autonomy, and the strengthening of accounting standards" (p. 303). The legal framework for the budget is centralized under the SHCP by the provisions of the Organic Law of the Federal Public Administration. The SHCP's Manual of Budgetary Rules creates the standards for the process. OA adds that "the SHCP is required by law to disclose fiscal information to Congress" (p. 304). Although amendments in 2003 to the Fiscal Coordination Law of 1979 began to shift tax authority from the states to the federal government, this shift has been reversed to some degree via a new program of fiscal federalism. The Tax Administration Service and the SHCP post the texts of federal and state tax laws. Both the Constitution and the Federal Law on the Administrative Responsibilities of Public Servants provide the ethical standards required of public servants. The Ministry of Public Function oversees compliance with ethical standards. OA notes that "in addition, most agencies and ministries... publish their own codes of conduct and standards for public employees" (p. 304).

Open budget processes

CP

According to the 2006 OA report, Mexico achieves a rating of "compliance in progress" (p. 308) for this standard. Medium-term fiscal policy objectives are set forth at the outset of each new administration, in the form of a National Program for Development Finance. In addition, the Constitution requires that the SHCP include a report called "Economic Policy Guidelines" (CGPE) in the budget documents package submitted to Congress in September. The "Guidelines" comprise an annual macroeconomic analysis that includes aggregate information on fiscal policy objectives. There is no requirement to disclose procedures or forecasting models employed in formulating macroeconomic projections, and none are offered. OA reports that, "based on the new Federal Law, annual budgets will now be presented in the context of a five-year quantitative framework" (p. 308). While this is an improvement over prior practice, OA notes that "medium-term budget frameworks still lack credibility" (p. 308). Although the CGPE includes information on macroeconomic assumptions, prior year results, and coming-year forecasts, it does not include an explicit fiscal-risk analysis. However, the 2006 Law should address some of these issues, according to OA. Also lacking from budget drafts are competing budget scenarios, although commentators to the OA report suggest they would enhance transparency. The OA notes that the SHCP provides Congress with a summary report on the fiscal cost of the tax code resulting from the current system of exemptions, subsidies, and differentiated tax brackets. The government's existing commitments and guarantees are reported in the comprehensive quarterly titled "Report on the Economic Situation, Public Finances, and Public Debt."

Fiscal sustainability studies are not comprehensive, according to OA. Per the report, "the CGPE reports incorporate a medium-term analysis on deficit sustainability for the public sector (p. 309). Provisions in the 2006 Law now make for greater clarity in the allocation of excess oil revenues, in an effort to reduce government discretionary spending and abuse. Under the present law, the allocation such "windfall" revenues is strictly scheduled. The present pension system is actually a patchwork of state, municipal, and federal systems, according to OA, but reforms are being discussed by the Congress. According to the 2006 OA report, 2004 saw a considerable decline in transparency in the classification system used in the budget documents. This was improved somewhat in the following year, but discrepancies in the codes used between 2005 and 2006 have led to certain problems of cross-year comparability regarding budget-allocation execution for some programs and rendered it difficult to properly evaluate program results. OA notes that, "currently, almost all expenditure is presented by program with the exceptions of national security expenditures, which are not disaggregated, and expenditures exerted by public companies and entities, since the planning and programming of these companies is coordinated, but not determined, by the sectoral secretariats or governmental agencies" (p. 310). OA finds that the classification system is largely consistent with international practice, however, and that data compilation and presentation has undergone some improvement.

According to the OA report, the recently introduced System for Budgetary Execution Control and the Integrated System for Federal Financial Management have helped to improve budget execution schedules and performance evaluations, with significant reductions in time-lags for reporting. The Treasury Department has completed its transition to these automated systems, and now can disclose real-time fiscal data for all levels of the government. The SHCP provides a monthly progress report on budget spending, including payment commitments and federal government guarantees. Another recently introduced system, the Integral Process of Programming and Budgeting, has helped to streamline planning and programming in the budget process. The government is also working on including performance indicators in the budget document to facilitate the assessment of spending impacts. However, OA notes that there are concerns about the apparent movement away from a focus on program goals toward institutional activities, and notes a general lack of periodic performance analyses in most budget programs. Provisions in the 2006 Law are aimed at moving closer to performance-based budgeting, and OA adds that "a national framework to evaluate program results against specific targets is... expected to be approved by March 2007" (p. 311). The Law on the Federation's Supreme Audit requires that the executive present a mid-year review to Congress that covers budget execution and audit control, and OA notes that the financial and programming information included in this presentation is also incorporated in the annual Public Account. Accounting is done on a modified cash-based system. OA reports that the government is in the process of implementing a comprehensive review of local government accounting practices, and has provided the states with technical assistance. The accounting guidelines are reported in the SHCP's monthly "Technical Bulletin on Government Accounting."

Mexican law requires that both the SHCP and the executive make fiscal reports to Congress and stipulates the frequency of such reports. The Fiscal Audit Office publishes an annual Review and Audit of the Federal Government Public Account by the end of March following the fiscal year in question. According to OA, "the report contains detailed execution information on the revenue and expenditure budgets, and provides an explicit comparison of budget execution against initial and amended allocations" (p. 312). The Fiscal Audit Office is also required by law to produce a mid-year report to Congress in August covering the federal government accounts. According to OA, Congress as yet lacks the technical ability to make optimal use of the information in these reports, should be given more time to scrutinize their contents, and a summary form should be made available to the public. OA states that provisions in the new law may address some of these concerns.

Procurement systems are governed by the Law on Procurement, Leasing, and Services in the Public Sector, as well as by provisions of the Law on Public Works and Related Services. The regulations contained therein, according to OA, "have substantially enhanced procurement systems" (p. 311). Each public entity involved in the process discloses procurement information on its website. The 1963 Federal Law on Public Sector Workers, as amended through 1998, governs employment in the public sector. Recruitment, promotion, and discharge or lay-off procedures are defined for two classes of workers: staff and management. OA reports that some concerns remain as to the "ample discretion in appointment practices" (p. 311), but there are efforts underway to render the recruitment and selection processes more competitive. Wage schedules are published online by individual employing unit.

Public availability of information.

CP

The 2006 OA Fiscal Transparency report notes that Mexico achieves a rating of "compliance in progress" (p. 305) for this principle. Both OA and the IMF's SDDS website disclose that Mexico subscribes to the SDDS and meets requirements of timeliness, coverage, and periodicity, albeit availing itself of timeliness flexibility options in the area of general and central government operations. Advance release calendars are also available on the SDDS website, the website of the National Institute of Statistics, and the SHCP website. Fiscal disclosure requirements are contained in the 2002 Federal Law on Transparency and Access to Public Information. This law provides the founding mandate for the creation of the IFAI, which serves as the public dissemination point for fiscal data, when it is requested. This data is also generally posted on government websites. Certain information is held confidential from the public for "national security" reasons but, beginning in fiscal year 2004, "important progress has been made... in the provision of information on the public sector's financial trusts (fideicomisos), which previously were unrecorded and seldom monitored owing to the confidentiality provisions established in the Banking Law" (p. 305). A schedule of required reporting dates is provided within the 2002 Law, including a requirement that budget data be released prior to the formal budget submission to Congress. OA records that there is a lack of clarity and quality in this pre-budget information, and that it is not comprehensive in its reporting on such items as debt composition, agricultural subsidies, public financial trusts, extra-budgetary funds, or the financial and non-financial assets of certain important public enterprises, including those of the state oil company. However, much of this information can be accessed through other government sources.

OA reports that data is disseminated on central government operations through the publication of monthly tables that include a breakdown of revenues and expenditures, net outstanding debt (domestic and internal), and debt payments. The SHCP provides both Spanish and English fiscal data on its website. Performance data is available in the reports filed with Congress on a monthly and quarterly basis, as is information on the changing macroeconomic environment. The SHCP also publishes a quarterly Report on the Economic Situation, Public Finances, and Public Debt. Also available are the less detailed Avances de Gestion, published every six months, but these provide only incomplete spending and revenue estimates for the year. According to the 2006 OA report, "general government statistics show detailed information on revenue from taxes, contributions to social security, nontax revenue and capital revenue" (p. 306). The system of classification employed is consistent and clearly established. Reporting is done on a cash basis, both for monthly and annual data. Coverage includes all state and municipal governments as well as the central government. The financial statements and balance sheets of non-financial state-owned enterprises are generally posted on their individual websites. This same data for public financial institutions is released by the CNBV. Public trust data is now becoming more available to the public by their inclusion in the "Report on the Economic Situation, Public Finances, and Public Debt." Subnational fiscal data is offered in the "Gazettes of States and Municipalities, but the OA report notes that the data are "not frequently updated and do not follow a standardized presentation" (p. 306). Regulations have recently been issued that aim to improve the fiscal transparency of reporting by the states and municipalities. The National Institute of Statistics collates subnational fiscal data using the Integral Information System and Municipal Database System. However, OA notes that the process is somewhat lengthy. An annual publication, the "Revenue and Public Spending in Mexico" report contains consolidated data on the general government as well as revenues of the states and municipalities, and information on spending and registered debt. OA notes that the 2002 Law "requires the publication of monthly reports on budget execution by institution, public finances, and debt within the guidelines" as they appear in the budget document. The SHCP makes this information accessible on its website as well. According to OA, Mexico complies with SDDS requirements by publishing "comprehensive information on outstanding domestic and foreign debt" (p. 307). Some of this information appears in the quarterly "Report on the Economic Situation, Public Finances, and Public Debt," as well as the monthly "Public Finance" and "Public Debt" reports. Certain additional, but not exhaustive information is also available on the stock of contingent liabilities arising from pension and healthcare reforms.

Independent assurances of integrity.

CP

The 2006 OA Fiscal Transparency report accords Mexico a rating of "compliance in progress" for this principle (p. 313). As disclosed on the IMF SDDS website, Mexico meets or exceeds all requirements for data timeliness regarding its fiscal data, albeit while availing itself of flexibility options with regard to general and central government operations data. Mexico generally follows the 1986 Government Finance Statistics Manual (GFSM) for its compilation methodology, and OA reports that it is considering transitioning to the 2001 GFSM edition. The legislation governing government operations data production and dissemination comprise the Law on Statistical and Geographical Information, the Federal Law on the Administrative Responsibilities of Public Servants, and the SHCP's Rules of Procedure. Included are provisions protecting the confidentiality of data. Budgetary cuts and supplements are subject to established annual thresholds stipulated in the budget documents, and any time the thresholds are exceeded they are included in the quarterly reports made by the SHCP to Congress. The potential for executive discretion in this regard has been limited by provisions of the 2006 Federal Law on Budget and Fiscal Responsibility through its strict balanced budget policy. OA reports that "public sector fiscal reports and the federal government's Public Account are reconciled with broad fiscal and monetary data" (p. 313), and adds that the government has substantially reduced the time lag for filing its Public Account. The scope of data provided has also improved at all levels of the government. The National Institute of Statistics's monthly publication "Statistics of the States' Public Finances" is used by the SHCP to improve the accuracy of its revenue, expenditure, and financing data. The internal audits conducted by the Ministry of Public Function have been criticized as "unreliable," according to OA, due in part to inadequate staffing and training. This leads to the perception that accountability for government spending is "weak."

The Law on the Federation's Supreme Audit governs the activities of the Federal Audit Office, which is an auxiliary of the Chamber of Deputies but functions with full institutional and operative autonomy. It has the authority to conduct external audits of the entire federal executive branch, federal public entities, and subnational governments. It presents its reports annually to the Chamber of Deputies for review and publication. Dissemination of these reports is done on a "by request" basis. The National Institute of Statistics does not engage in any audit functions, but is empowered to develop and promote an integrated system of national and economic accounting. Using this system, the Secretariat of Finance and Public Credit compiles and disseminates federal government financial statistics, but the National Institute of Statistics has no capacity to verify the Secretariat's work product, per the OA report. While the National Institute of Statistics is currently a part of the SHCP, new legislation, including constitutional amendments and a new Organic Law of the National Statistics Agency, is currently being discussed that would give it statutory autonomy. According to OA, "the reform also aims to launch the 'National System of Statistics, Informatics and Geography' -- a system that will collate the output of the various data-producing agencies and serve as the main access point for national statistics and survey information" (p. 314).