Structural Fiscal Rule: A Better Discipline than a Fiscal Council

Abstract

In 2011 we recommended the application of a structural fiscal rule to the case of Mexico, given the country's repetitive inability to implement a genuine fiscal reform. At that time, we said that due to the absence of a fiscal reform that increases tax revenues significantly, Mexico needs to adopt a structural correction in its public finance through the implementation of a rule. The structural rule would eliminate budget volatility and would give fiscal policy more countercyclical power. Since the structural rule promotes fiscal certainty, the country would reinforce investors' confidence and would strengthen public finances. We established that the rule would not substitute the fiscal reform needed, but it would make the reform less urgent since it would introduce a structural discipline in the government expenditure, which would also make the budgeting process more efficient. At the end of 2012, the newly elected government announced it intended to apply a structural balance rule, but no such rule was ever applied. In 2014, a fiscal reform was implemented. However, given the absence of the structural rule, the gains generated by the reform vanished as a result of more government expenses. An increasing fiscal imbalance and accelerating debt were the costs paid by the country for not implementing the fiscal rule. More recently, an independent fiscal council has been recommended by the IMF. In Part 1 of this paper, we reproduce the structural fiscal rule proposed in 2011, highlighting its main advantages. In Part 2, we make an assessment on the nature of a fiscal council and the main weaknesses for its application in Mexico.