Remarks by Angel Gurría, OECD Secretary-General, for the release of the OECD Review of Budgeting in Mexico
Mexico City, January 7, 2010
Mr. President, Minister Cordero,
Ladies and gentlemen,
It is a great pleasure for me to be here to launch the OECD Review of Budgeting in Mexico. This study focuses on Mexico’s budgetary institutions and processes, which are key tools for promoting sustainable public finances and improving public-sector transparency and performance. It also measures Mexico against the relevant international practices and standards. The review’s conclusions are important in the current context of fragile global economic recovery in which, given the measures implemented to cope with the crisis, fiscal sustainability is an urgent objective.
Our analysis starts by acknowledging the undeniable progress Mexico has made in terms of expenditure formulation, approval and execution, in line with international practices. Important legislation has been passed since 2006, particularly in the federal budget and fiscal responsibility law (LFPRH) (leading to the balanced budget rule and the 2007 Tax Reform, which focused on ways of strengthening fiscal responsibility and transparency, and, lastly, the 2008 General Fiscal Accounting Law).
Mexico has been consolidating the stability of its public finances for over a decade now. The public sector borrowing requirement — the broader definition of fiscal deficit — has been below 3% of GDP for the last five years, and public sector debt stands at 40% of GDP. Albeit aided by high oil prices, Mexico’s good record reflects a culture of fiscal responsibility that has put the economy in a stronger position to cope with the crisis.
Despite these achievements, Mexico faces a number of challenges that limit its capacity to achieve healthy and sustainable public finances in the longer term. These include the country's high dependency on oil revenues; the need to improve the efficiency of public expenditure and strengthen fiscal sustainability; and the need to improve expenditure accountability at the different government levels. These factors have an impact on the Mexican economy’s growth potential.
While enacting appropriate legislation is important, it is only the first step; the corresponding legal frameworks need to generate the expected changes and outcomes, and implementing them requires close collaboration between the various ministries and levels of government, as well as better institutional capacities. It is particularly important that the states of the federation and municipalities apply the same efficiency, accountability, responsibility and transparency measures that are applicable at the federal level.
For that reason, we applaud the Mexican Government’s decision to move towards performance-budgeting criteria and to define and apply performance indicators in the budget formulation process, as a cornerstone of the reforms introduced to improve the efficiency and effectiveness of public spending. These reforms have achieved a number of major successes in their first year, but the effort needs to be maintained to achieve full implementation, while improving coordination between the institutions and different levels of Government. Setting up an inter-agency council could help strengthen coordination between the various government offices — the Ministry of Finance and the Ministry of Public Administration, CONEVAL and the Federal Audit Department.
Looking ahead, we have identified several areas in which the budget process can be improved and the impact of spending policies strengthened. These include the following:
(1) Improving budget formulation
Like many other countries, Mexico formulates its budgets annually. However, as many other countries are already doing, it needs to develop a broader, more inclusive medium-term budgetary framework (3-5 years), which also includes long-term estimates (20-30 years). This would provide greater stability, help to improve planning and bring funding more into line with government plans and objectives, without ignoring future challenges such as lower oil revenues and changing demographics.
(2) Enhancing the legislature’s role in the budget process
The Mexican Congress has an important role to play in the budget process. Our Review recommends that Congress engage in reform initiatives and be encouraged to use indicators to monitor the performance of the relevant ministries and agencies, and provide input for discussions on the budget.
(3) Improving budget execution
This is one of Mexico’s key challenges. Public money not only needs to be used on time and in the areas for which it is approved; it also needs to achieve the expected results. The Mexican civil service has a highly legalistic tradition that stresses strict adherence to rules norms and processes, rather than focusing on achievement of the proposed objectives. This legalistic tradition (which includes heavy penalties) can generate a "culture of fear", in which civil servants prefer not to act; and in extreme cases, this can lead to government paralysis.
We therefore support the gradual introduction of a system of performance appraisal based on the achievement of targets and priorities in place of the current complex and rigid system based on excessive rules and controls. A results-based system would give civil servants greater room for manoeuvre to achieve the proposed objectives, as well as more control over the details of budgetary management and the reallocation of resources. Personnel management government procurement and the government's regulatory functions also need to be refocused.
Clearly, this greater flexibility presupposes better training for civil servants, and a robust scheme of accountability. This is particularly important at the state and municipal levels.
Improving the planning, formulation and execution of public spending raises the urgent need for sufficient, stable and sustainable public income that does not dependent on a single source. We therefore view Minister Cordero’s announcement of his intention to pursue comprehensive fiscal reform in 2010 as a wise decision. Fiscal reform is a long outstanding task and Mexico’s most important political-economy challenge. There have been several earlier attempts to introduce comprehensive reform in line with international trends, but they have so far been unsuccessful. This time, in the context of a fragile economic recovery, we hope that all political players are now convinced of the need to provide the Mexican State with sufficient resources to grow and overcome its social deficits. Previously we had the luxury of being able to choose between squeezing Pemex or adopting a more modern, more competitive, more inclusive and fairer fiscal framework. That alternative no longer exists; time has run out.
As always, Mr. President, the OECD stands ready to support you in fulfilling these urgent tasks.
Thank you very much.