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Contents | Executive summary | How to obtain this publication | Additional info
The following OECD assessment and recommendations summarise chapter 2 of the Economic survey of Mexico published on 4 October 2007.
Click here to read the addendum to the Economic Survey of Mexico 2007.
Contents
Public finances should be put on a stronger footing
Mexico has gained a solid reputation for fiscal rectitude, and the new fiscal responsibility law is expected to facilitate prudent fiscal management. It establishes strict budget rules and defines new guidelines for allocating excess revenue and drawing from the various stabilisation funds (the States Revenue Stabilization Fund, PEMEX Investment Stabilization Fund and the Oil Stabilization Fund). Also important to improving the soundness of public finances has been the reform of the federal government employees’ pension system (ISSSTE), on which the government managed to build a consensus and which was approved in March 2007. The reform substantially reduces the government’s pension liabilities and allows portability of pension rights between the government and the private sector. Building on it, the government should now reform the other social security sub-systems of government agencies and state-owned companies. Other key reforms are needed to reduce the dependence of the budget on oil revenue and address fundamental weaknesses in public finances. Aware that the current fiscal settings fall short of what is needed to support the growth process, the government submitted to Congress in June 2007 a wide-ranging public finance reform. The reform package includes four main pillars:
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Improving tax administration in order to facilitate tax compliance and to fight tax avoidance and evasion more effectively.
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Establishing an institutional structure that guarantees more efficient and transparent spending at the three levels of government.
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Redefining fiscal federalism by providing states and municipalities with better tools and incentives and promoting responsibility and accountability at all levels of government.
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Setting the foundations for a tax system that allows the substitution of oil revenues with more stable sources of income.
If approved, this reform would represent a significant step forward. It would lay the ground for additional measures that may be required in the longer run to further strengthen public finances.
Tax revenue and the level of income in comparison(1)
1. 2004 or nearest year available. Government revenue including social security contributions. Unweighted average for OECD. Public sector for Brazil. Central government only for Chile.
2. Government revenue (including social security): with oil revenues of the federal government (x) and without this component (o).
Source: OECD, Revenue Statistics database; OECD, National Accounts; Mexico, Ministry of Finance; World Bank.
Strengthening tax administration
Despite recent improvements, tax compliance remains relatively cumbersome and costly, especially for self-employed professionals and small and medium-size enterprises. Moreover tax evasion remains high. Measures have been proposed to facilitate voluntary compliance with tax obligations and tackle evasion, smuggling and informality. Moving in this area is important for the success of the overall public finance reform, as it would raise the perception of fairness in taxation and make the reform package more effective.
Increasing public spending efficiency
As part of its reform package, the government is proposing to strengthen the system of performance evaluation for public programmes. Building on progress achieved over the years in budgeting and public management, the plan is to introduce mechanisms for a more systematic and objective evaluation of the impact of government programmes, combined with measures to modernise public management and rationalise public services. Achieving efficiency gains in public spending at all levels of the public sector would go some way to limiting new funding needs. It would also contribute to improving the quality of public services, while enhancing the fiscal position. Two areas for reform on the spending side can illustrate this point. First, in education, a larger share of spending should be allocated to non-wage items that are important for the quality of education services, while teachers' training and selection need to be strengthened. Rebalancing the allocation of spending and ensuring that the financial incentive scheme in place for teachers serves its purpose are some of the options to improve education outcomes. Second, subsidies which prevail in many areas (such as water, electricity and gasoline) should be reduced. They are costly for public finances, tend to be regressive and distort incentives. Removing subsidies and using part of the savings for direct cash transfers to the neediest would achieve several policy goals simultaneously: i) encouraging investment in areas of vital importance for growth and living standards (e.g. water); ii) improving income distribution by increasing the progressivity of public spending; and iii) increasing incentives for consumers to be more efficient.
Revamping relations with sub national governments
Fiscal relations across levels of government are another area where there is scope to improve the efficiency of public spending. The devolution of spending responsibilities to states and municipalities has been rapid, the process intensifying in recent years as states received a proportion of higher-than-budgeted revenue for investment. Generous adjustments in federal transfers have reduced sub-national governments’ incentives to use their taxing powers and raise their own revenue. In line with recommendations made in the OECD Economic Survey of Mexico, 2005, the reform proposal seeks to modify the formulas for the allocation of federal transfers to sub-national governments to better reflect objective needs and outcome evaluation. Furthermore, sub-national governments would be given more room to raise their own taxes. This last point is fundamental to increase states’ accountability. Improving the quality of information on spending and outcomes at the sub-national levels of government, as included in the proposal, would also help promote accountability by increasing the transparency of spending.
Moving ahead with the tax reform and improving tax compliance
To strengthen public finances and improve the stability of revenue, there is a need to restrict the numerous exemptions or special regimes and broaden the overall tax base. The government’s proposal envisages introducing a minimum general income tax on firms and professional activities, which would tackle the exemptions, tax deductions and preferential regimes that currently create uneven incentives and complicate the administration of the income tax. Together, the proposed tax administration measures and tax reform are expected to generate additional revenues of close to 3% of GDP by 2012. In the longer run, consideration should be given to further broadening the tax base on the VAT side, which is plagued by exemptions and a large proportion of zero-rated goods and services. This would reduce the distortions on the economy and bring in additional tax revenue while also simplifying administration. As part of the VAT reform, measures may have to be taken to provide some compensation to low-income households. Measures will also be needed to raise the very low proceeds from the real estate tax (administered by municipalities) to levels observed in other OECD countries. Such a move would contribute to raise overall tax revenues in a fair way and it would increase taxing powers of sub-national governments.
Modernising the corporate governance of PEMEX
To ensure the best returns form Mexico’s oil resources and production stability in the medium term requires improvements in the efficiency and financial performance of PEMEX, as well as adequate investment decisions and operation. Mexico should reform the corporate governance of PEMEX to strengthen the incentives and accountability for maximising the company’s efficiency. Future oil production largely depends on the development of new projects requiring major investment. A new fiscal regime was introduced in 2006, so that PEMEX would have additional resources. It will be important to assess whether these resources are sufficient for the company to undertake adequate oil-field maintenance and development. Many improvements could be made even within the current constitutional framework. Government's interference in management of the company should be minimised. The company’s own social security regime should be reformed to bring it in line with that of the private sector (and the new civil servants regime). Finally, the existing public works contracts that engage the private sector in production projects appear to be insufficient for PEMEX to access the technology it needs and to help manage risk exposure better. In this context, and while recognizing that more fundamental reforms are not on the agenda, legal changes will likely be required – sooner or later – to allow joint ventures with private companies in exploration and production from deep oil reserves.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
Una versión para imprimir de la síntesis en Español, en formato pdf, también puede ser descargada. Esta incluye la “Evaluación y recomendaciones” de la OCDE, pero no incluye todas las figuras que aparecen en las paginas anteriores.
The complete edition of the Economic survey of Mexico 2007 is available from:
- SourceOECD for subscribing institutions and many libraries
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OLISnet, under "Publication Locator", for government officials with accounts ( subscribe)
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Additional information
For further information please contact the Mexico Desk at the OECD Economics Department at eco.survey@oecd.org. The OECD Secretariat's report was prepared by Bénédicte Larre, David Haugh and Bruno Rocha under the supervision of Stefano Scarpetta. Research assistance was provided by Roselyne Jamin.
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