Prospects for democracy in Mexico: A public finance perspective
In his latest analysis for the Wilson Center Gabriel Farfán Mares provides insight on the implications of Mexico’s budgetary process and the long-term consequences for Mexico’s democratic system.
With special thanks to Dr. John Bailey, Emeritus Professor and former Director of the Mexico Project at the Center of Latin American Studies, Georgetown University, for his comments and input.
Free and fair elections are key but not unique components of full democracies. Institutions matter, and among these, national congresses are, or at least should be, key players. But their role goes beyond a political or legal one. In mature democracies, congresses have a special role in governing the public purse, and this means not only approving but truly overseeing the Executive’s power budget execution by looking at how public revenues, expenditures, and debt, evolve. Yet, democracies also need to deliver and for this, proper funding is key. Indeed, part of being considered a full democracy means better services and public policies, as well as long-term sustainability which can only be supported by proper taxation. Mexico has been historically incompetent to raise taxes and the current president has ruled out the possibility of a tax reform.
In this paper, I argue that Mexico has accomplished a historical record of political and economic stability. Over the past 25 years, it has succeeded in institutionalizing electoral democracy, with periodic, transparent, and competitive elections. Yet, Mexico appears to have reached the limits of its democratic potential. With respect to checks and balances in budgetary processes, the national congress has played a negligible role, especially with regard to oversight of budget execution. This issue is important because the annual national budget typically experiences significant changes and citizen voices are unheard because of the lack of congressional presence. Less obvious, but also important, is that taxation is insufficient to provide the goods and services of a mature democracy. The average Mexican voter might bristle at the notion of not being taxed enough, but Mexico ranks near the bottom of Latin American countries with respect to taxation as a percentage of GDP. While the current government has improved tax management, longer-term tax policy is not on the agenda. Overall, due to the lack of resources, presidents and Congress have struggled to fund their short-term policy priorities, and their long-term policy goals are often only aspirational.
This paper is comprised by 3 sections. In the first section I address Mexico’s historical and present issues regarding taxation. In the second section, I argue that current economic and fiscal policies have promoted political and economic stability and that ideological considerations are an obstacle when assessing both previous administration and the present government’s budget execution. In the third and final section, I argue that Congress does not change the executive budget proposal over the years and despite this, the executive budget execution fluctuates on a variety of key indicators. I argue that a stronger Congress, at least in budgetary affairs, does not necessarily put a strain on the Mexico’s stability, but actually enhances Mexico’s democratic system.
More revenues are welcomed, not taxes
Mexico looks like a giant on shaky feet, since its capacity to raise taxes is far from its LAC counterparts. Mexico’s government revenues as a percentage of GDP are closer to Africa’s average (16.6%) and near the bottom of countries in LAC, as shown in Table 1. At the subnational level the situation is worse, given that almost all states and municipalities are completely financially dependent on federal government transfers.
Mexico’s current government has been able to sustain and even boost tax revenues. This has served as an anchor for public debt sustainability and macroeconomic management. From a national perspective, stable and growing revenue has been obtained through rigorous tax management, including cancelling tax credits, collecting delayed or contested tax payments, and reducing tax expenditures, among other factors. In terms of revenue, the arrival of a new government that had no previous agreements with major firms and other political parties, significantly helped to centralize revenue management, substantially reducing tax erosion, elusion, and evasion. Yet, even as the Mexican government has made a huge effort to increase tax and non-tax revenues (by depleting funds in public trusts), there are three notable problems: lack of urgency; poor views on the importance of fiscal policy; and free-riding subnational governments.
The public and the government’s perception is that the lack of tax revenues, at least in the short run, is not a pressing one and therefore a fiscal reform is not necessary. In other words, the current administration believes that the cost of a fiscal reform exceeds the benefits. Second, there are no incentives for a long-term revenue policy and the government is persuaded that more rigorous tax management can continue to fund the government’s activities.[i] Third, states and municipalities lack incentives to raise revenue, which is fundamental when implementing successful public policies. AMLO committed to present a fiscal reform during the June 2021 midterm elections, yet this promise has been forgotten from governmental or non-governmental actors, such as analysts, journalists, as well as other organizations that have started to focus on other public finance issues.[ii] A final but crucial component is that the Mexican president’s extraordinary budget discretion limits the need to present a tax reform to achieve its objectives. Budget discretion affects all stakeholders’ incentives to pursue a tax reform, including the federal bureaucracy, subnational governments, and the political class. Budget discretion helps to efficiently mobilize resources without legislative action, effectively blocking the accountability function of political representation. Lastly, in the last half century oil revenues have played an important role in supporting the President’s budget discretion.[iii]
The President’s budget discretion: business as usual
Political stability is undeniably strong in Mexico. Since 1934, the peaceful transition of power of one Mexican president to the next has occurred, positioning Mexico as an exception in the Latin America and the Caribbean (LAC) region. The loss of the majority in Congress by the official party in 1997 and the subsequent election of presidents from opposition parties qualifies Mexico as an electoral democracy at the national level, with competitive elections at state and local levels as well.[iv] Elections at all levels continued in the midst of economic shocks (e.g., the 1994 so-called “Tequila” episode, or more recently, the 2008 global financial crisis) and public health crises (e.g., H1N1 in 2009, or more recently, the COVID-19 pandemic). Up to now, the prospects for a stable and resilient democracy seem relatively positive. Mexico has been able to avoid the collapse of its government even during sizeable political, social, and economic shocks.
Nevertheless, many questions remain in terms of Mexico’s political and economic viability. Analysts find it difficult to understand how Mexico has been able to keep its macroeconomic fundamentals relatively stable and sound for so long. This is especially true during the Andrés Manuel López Obrador (AMLO) administration (2018-2024). When AMLO was running as a presidential candidate in 2006, many labeled him as a “danger for Mexico,” mostly because of his supposed ideological connection with former president Luis Echeverría (1970-1976), who is considered one of the best examples of “macroeconomic populism” in the LAC region. Before and after AMLO’s election as president in 2018, the most vocal critics publicly warned about his potential for increasing public debt to unsustainable levels and therefore generating an economic crisis similar to those that occurred in the 1970s and 1980s. It is true that the Mexican government has increased its debt, but as of 2022, both the magnitude and trajectory of the debt are sound.
Even so, aside from various academics and international actors, many (both inside and outside Mexico) predicted that AMLO’s priorities and policies would lead to disaster. However, according to government and independent sources, with the exception of an initial spike in 2020, public debt seems stable and under control, and the Mexican peso stands out among other emerging markets currencies as relatively safe for investors. Even Pemex, the national oil company, which is considered one of the most important causes of instability, has not been downgraded by credit rating agencies.
During the first months of the AMLO administration, as a General Director for International Financial Institutions in the Mexican Ministry of Finance (Secretaría de Hacienda y Crédito Público), I witnessed how the decision to cancel the new Mexico City airport jolted both investors and public opinion. Members of the political opposition argued that these decisions were questionable or wrong, and some analysts found some of the President’s policies highly controversial (e.g., construction of another oil refinery, a massive train project in Southern Mexico, and another airport). Fears of economic turmoil and fiscal collapse spread in national and international news outlets. It is surprising that after four years in power, many are still waiting for the economic fundamentals to start deteriorating or collapse. For now, credit rating agencies, international financial institutions, and global investment banks have almost unanimously discarded such a scenario.
Representation, no taxation, and no accountability
A significant amount of public money traditionally has been reallocated to a variety of budget items deviating from the original congressional mandate. This should not be surprising since in recent years Congress has largely rubber-stamped the Executive’s budget proposal. Both the first legislature of AMLO’s government (2018-2021) and the current one (2021-2024) have supported the President’s proposals by leaving the budget almost untouched. From a strictly financial perspective, a variety of organizations and researchers had pointed out the unrealistic, unfeasible, and low credibility features.[v] Economic and comparative research has shown that Mexico has underestimated revenues and expenditures, often seen as a proxy for good capacity and prudent forecasting that helps fiscal discipline. Nonetheless, there are incentives that go beyond sound econometrics and good economics to underestimate revenues and expenditures.[vi]
Mexico’s current government is blamed for reallocating large sums from the legislative budget decree -initially appropriated to fund public goods and services, public policies, and civil servants- to fund the President’s priorities. The reality is that these actions have existed for decades. The most notable change in recent years is the trivial role of the Chamber of Deputies (Mexico’s lower house) which has neither modified the President’s budget proposal nor sought to control its execution during fiscal years. The Chamber of Deputies’ mandate to discuss and approve the budget has worked for more than a century, yet deviations of budget execution, also called virements during fiscal years (January-December) by the Executive Power has varied substantially as noted in the graph below.
As shown in Figure 1, in the last half century, some administrations barely deviated from the spending ceilings, or maximum financial resources allocated to a ministry or a budget line item,[vii] while others considerably deviated from the Budget Decree. Counterintuitively, after the arrival of the first opposition president in more than 7 decades - in large part due to the establishment of a more competitive and politically democratic system- Congress has barely modified the President’s budget proposal. Perhaps more important, the executive power has consistently deviated from and contravened Congress’s mandate to fund specific government’s policies. In Mexico, more political democracy has resulted in less fiscal accountability.[viii]
After the first opposition president won in 2000, there were two 6-year term center-right presidents in power consecutively. Yet, in 2012, a hegemonic party priísta[ix] , Enrique Peña Nieto, returned to power. Even under AMLO’s center-left government, all budget decrees were modified (sometimes considerably) upon a detailed review of cashflows from 2006 to 2022. This period is important because a new and current Budget Law orders the executive power budget officials to report to Congress all item budget deviations that decrease or increase 5% or more from the budget that Congress originally approved.[x]
In order to understand the trajectory of budget deviations promoted by the executive power, Figure 2 shows the magnitude of budget deviations from 2000 to 2022. It can be noted that deviations as percentage of GDP are relatively higher in recent times and cabinet ministries budget percentage deviations of the original budget are highly correlated.
Figure 3 covers budget deviations from 2006 to 2021. This period is important because it includes the budget deviations that occurred under the new Budget Law, which obliges the executive to report to the Chamber of Deputies all line item budget deviations that fluctuate 5% or more. It is important to note that both the value and number of deviations had substantially increased. From 2013 to 2021, there were approximately 200 budget deviations per year (blue line), which were reported to Congress.
In light of the changes consistently introduced in budget implementation, I wrote a book to analyze these trends in detail. The most important finding is that Mexico’s Congress has apparently abdicated its power of the purse and its role to oversee the executive’s use of the public’s money. Since 2006, Congress has rarely modified the executive’s budget proposal and has not issued any comments on the budget deviations that have occurred under the new Budget Law. This puts into question some of the earlier studies on the relationship between the executive and legislative branches, which assumed that electoral democracy would turn Congress into a new power.[xi] As my book argues, it is the availability of public money, not political democracy, which forces Congress to play an active role in the budget appropriations process. In sum, in a democratic system, which promotes checks and balances as a means to achieve accountability, Mexico’s Congress falls short.
Path dependency, institutional inertia, and a strong system of incentives
The resiliency of Mexico’s government macro variables, tax revenues and debt even with the COVID-19 pandemic and other economic shocks, has been achieved at a great internal cost: public policies, goods, and services are underfunded and accountability has declined. While one could argue that many of the governments’ efforts to confront the impacts of public health and economic shocks by using revenue and other expenditure tools were necessary, Mexico’s internal cost in trying to preserve its macroeconomic fundamentals was enormous. This stands in stark contrast with many opinion leaders and strong critics of the current government who warned about trying to replicate the “macroeconomic populism” policies of former priísta and echeverrista administrations.[xii] Budget discretion can be considered as a component of an authoritarian government, when former presidents “ran the economy” or used public funds as they deemed fit. However, budget institutions that guarantee the political class uncontested discretion and preserve macroeconomic stability are a powerful tool that transcends ideologies. Analysts often argue that the budget under right, center - right, left, or center-left governments imply significant differences in a variety of fiscal policies components. For example, it is assumed that “leftist” governments overspend and increase public debt, often pushing public finances towards an unsustainable path. “Center-right” or “right wing” governments are not interested in tax reform or reducing the level of taxation. Up to now, in Mexico budget discretion seems resilient to any other ideological consideration.
The common denominator is that no one is interested in changing the system. The president does not want Congress to function as a real check and balance on the executive branch, as it would dilute his power and enhance accountability (budget cuts can be fast and strong without any delay). In addition, budget officials have no incentives to present a reform because the status quo benefits their bureaucratic power, and Congress has no political incentives to perform its due diligence, particularly if the governing party has a majority in both chambers or the president can channel funds and engage into vote buying.[xiii] Finally, the President has no interest in pushing for a tax reform because it would dilute his power over the allocation of funds. All the above contribute to underfunded public goods and services because they are prone to political changes and macroeconomic instability.
If Congress does more to oversee the executive branches’ extraordinary budget discretion powers, it could spark internal political turmoil and could halt the president’s agenda, which could harm an already inefficient system. Perhaps more importantly, Mexico can lose a strong tool for macroeconomic fine-tuning since it can adjust its expenditures quickly in the event of a sudden revenue loss. There are many reasons to argue that the existing approach works, given that funds are swiftly allocated to address social, political, an economic needs (despite Congress’ mandate). Finally, as long as there is no more revenue coming from better or new taxes, government is underfunded and therefore, there is no need for more Congressional involvement in public finances.
Yet, Congress can and should play a better role in monitoring, analyzing, and evaluating, when and why the government deviates from its own budgetary objectives. The lack of consistency between what the executive asks Congress to approve and what it actually spends puts into question whether long-term policy goals, reliability, and credibility the Mexican budget can be achieved.[xiv] This is even more concerning given that Congress rarely, if ever, modifies the executive’s budget proposal. Budgets should be not only transparent, but also reliable and predictable.[xv] The lack of consistency can hurt a democracy in the way that the system can promote government’s waste, largesse, and corruption. The nature and magnitude of the recent government’s extraordinary budget deviations also have the potential to damage macroeconomic and financial stability in the long run. Finally, the absence of fiscal legitimacy through the delivery of public goods and services erodes political and electoral processes and the construction of a virtuous cycle of citizenship. The Mexican Congress has the opportunity to strengthen its current budget oversight technical capacities, or as I argue, build an independent Fiscal Council as many other countries have around the world.
[i] In contrast with other countries where the national Congress are bicameral or is divided in two chambers (i.e. representatives and senators), in Mexico it is the Lower House or Cámara de Diputados the only chamber that oversees the budget.
[ii] A variety of civil society organizations, academic, and research institutes still call the attention on the importance of a fiscal reform in Mexico, yet the issue has clearly lost momentum and public interest. Among those are the Mexican Community on Public Management for Results, Mexico Evalúa, and Centro de Investigación Económica y Presupuestaria A.C. (CIEP).
[iii] Since the fall of oil prices in 2014 oil has provided less revenues but oil production is still seen as a source of resources for funding state activities and support economic policy.
[iv] This is consistent with the fact that the current government disbanded the Undersecretary of Revenues in 2018, which was historically placed within the Mexican Ministry of Finance (Secretaría de Hacienda y Crédito Público, or SHCP as it is often referred to).
[v] See Edna Jaime and Eréndira Avendaño analysis of the budget of the Office of the President http://repositorio-digital.cide.edu/handle/11651/138, Mexico Evalúa Caja Negra https://www.mexicoevalua.org/descifrando-la-caja-negra-del-gasto/ and other studies by GESOC https://www.indep.gesoc.org.mx/
[vi] See Hadzi-Vaskov, Metodij, Luca A Ricci, Alejandro M. Werner, and Rene Zamarripa, Authorities’ Fiscal Forecasts in Latin America: Are They Optimistic?, IMF Working Paper No. 2021/154 (https://www.imf.org/en/Publications/WP/Issues/2021/06/04/Authorities-Fiscal-Forecast-in-Latin-America-Are-They-Optimistic-50223). As a former Budget Director of the Mexico City, I promoted a reform with the support of the Inter-American Development Bank to reduce budget discretion by implementing results-based budgeting.
[vii] We refer to what Mexican authorities refer as “Budgetary programs” which are equivalent to public policies.
[viii] The current Budget Law, introduced in 2006 explicitly orders the Executive Power only to report (each quarter) all deviations from the initially authorized budget line items by Congress that are equal or higher than 5%. According to Law, the budget congressional committee has the option to issue an opinion on these. The author has been unable to locate any opinion made on any deviation from 2006 to date.
[ix] The term priísta has been historically used to identify a member of the Partido Revolucionario Institucional, or PRI by its acronym. All Presidents from 1929 to 2000 belonged to this political party and from 1934 their constitutional term in power was uninterrupted.
[x] Articles 58 and 59 of the current Ley Federal de Presupuesto y Responsabilidad Hacendaria which was introduced in 2006 regulate budget execution. Article 58 states that “When the budget adjustments represent as a whole or by a only once a variation greater than 5 percent of the total budget of the branch of in question or the budget of an entity, the Secretariat (Ministry of Finance or SHCP) must report it in quarterly reports. Based on this information, the Commission of Budget and Public Account may issue an opinion on said adjustments”. The author has been unable to find any opinion issued by the Commission in public sources.
[xi] See Luis Carlos Ugalde, The Mexican Congress: Old Player, New Power, CSIS Washington, D.C., 2000 and specially María Amparo Casar, “Executive-Legislative Relations: The Case of Mexico (1946-1997)”, in S. Morgenstern & B. Nacif (Eds.), Legislative Politics in Latin America, pp. 114-146, Cambridge University Press, 2002.
[xii] See Dornbusch, Rudiger and Sebastian Edwards, The Macroeconomics of Populism in Latin America book, published in 1990 but focused in analyzing Latin America and the Caribbean countries macroeconomic mismanagement especially in regard to public spending.
[xiii] According to a recent publication of the OECD and the IADB, Mexico ranks first in Latin America and the Caribbean in vote buying at local, state and federal elections, see https://publications.iadb.org/es/panorama-de-las-administraciones-publicas-america-latina-y-el-caribe-2020
[xiv] A second generation of Budget policy reform considers credibility as a key component of sustainable development and part of the SDGs agenda, see https://internationalbudget.org/issues-lab/budget-credibility/
[xv] Mexico occupies the 5th position in a global raking (120 countries considered) that measures budget transparency. It ranks above the OECD average in transparency and public participation. See https://internationalbudget.org/open-budget-survey/country-results/2021/mexico
About the Author
Gabriel Farfán Mares
The Mexico Institute seeks to improve understanding, communication, and cooperation between Mexico and the United States by promoting original research, encouraging public discussion, and proposing policy options for enhancing the bilateral relationship. A binational Advisory Board, chaired by Luis Téllez and Earl Anthony Wayne, oversees the work of the Mexico Institute. Read more