III. Public Finances
In 1997, a continuing commitment to strong public finances will result in a more stable
macroeconomic environment with higher domestic savings and increasing productive investment.
Consistent with a track record of strict fiscal discipline, the government’s primary guideline in
designing the Budget for 1997 was to produce a fiscally sound budget which is based upon realistic
budgetary assumptions.
Why is the budget fiscally sound?
In assessing the fiscal soundness of the budget, it is essential to consider the various elements that
underlie the target of a fiscal deficit of 0.5% of GDP.
- Additional pressures to public finances from the social security system (0.67% of GDP) and
interest costs related to the debtors support programs (0.35% of GDP) amount to 1.02% of
GDP.This figure implies a significant fiscal effort in order to achieve a deficit of only 0.5% of
GDP.
- The estimated fiscal deficit implies both a primary surplus as well as an operational surplus.
- Excluding the costs of the social security reform, the primary surplus will amount to 4.04%
of GDP, which is 0.47 percentage points higher than in 1996.
- Including the costs of the social security reform, the primary surplus will amount to 3.37%
of GDP.
- The operational surplus is expected to amount to 0.48% of GDP. Thus, there is a decline
in real terms in the domestic debt balance and a significant public savings effort.
- Summing up, the various sources of pressures on public finances (depicted in the table
shown below) will generate a fiscal cost of 1.32% of GDP. On the other hand, a
rationalization of expenditures and revenues will bring about a significant increase in public
savings amounting to 0.81% of GDP, thus reaching a fiscal deficit of only 0.51% of GDP.
Public Balance , 1997
(As % of GDP)
| Pressures on Public Finances for 1997: | 1.32 |
| Social security reform (July 1st, 1997) | 0.67 |
| Higher programmable accrued expenditure | 0.31 |
| Lower IMSS revenues | 0.36 |
| Debtors support programs | 0.35 |
| Other:* | 0.3 |
| Expenditure and revenue rationalization measures: | 0.81 |
| Higher tax revenues | 0.52 |
| Programmable expenditure cut | 0.29 |
| Public Balance 1997 | -0.51 |
*/ This figure is the net result of additional pressures and other positive
effects of the various source on public finances.
Why is the budget realistic?
Conservative projections embedded in the 1997 Budget reinforce the sustainability the fiscal
position in light of potential uncertainties:
- There are basically two issues regarding oil revenues in 1997: (i) Higher export platform, and
(ii) lower oil prices compared to the observed average in 1996. The assumption for the price
of the Mexican crude oil export mix for 1997 is 14.50 dollars per barrel, compared to an
observed average price of 18.05 dollars per barrel in 1996.
- Tax revenue projections are in line with the estimates of the different components of
aggregate demand. (See Appendix B)
- As was done in the two previous years, interest payments projections are based on realistic
assumptions concerning both expected inflation as well as real interest rates.
- The government’s current account, that is, the difference between dollar inflows (mainly oil
exports) and dollar outflows (mainly interest payments on external debt), registers a small
surplus. Thus, moderate movements in the exchange rate level do not affect the fiscal
balance.
