On July 3rd, the Chamber of Deputies’ Commission of Constitutional Matters approved almost unanimously (apart from one abstention) the own-initiative opinion of a constitutional reform regarding public debt. Allegedly, the issue will be discussed during an extraordinary session in Congress to be exercised in the second half of July. This initiative has a goal to reform existing regulation on the debt process of states and municipalities. In the face of the coming debate, it is worth highlighting some remarks about the topic’s severity and the possible scenarios for the reform.
It is important to clarify that public debt is not a negative matter per se. On the contrary, acquiring public debt is essential and, if adjusted with appropriate planning, can turn out to be quite useful. In order for this to happen it is necessary to establish a maximum debt top that responds to the government’s ability to pay and that will not paralyze future administrations. However, local governments not only have made good use of this financing source – let us remember not only the iconic case of Coahuila but other eight states that, between 2006 and 2012, reported an exponential growth in their liabilities (those entities were Zacatecas, Campeche, Chiapas, Tamaulipas, Nayarit, Quintana Roo, Veracruz and Michoacán). Uncontrolled debt has generated high risks of financial insolvency and limited the governments’ ability to invest in public programs. Regardless of the almost 350 billion pesos that federal entities have in debt – as of the first quarter of 2013 – the consequences of this mismanagement are confined to the local environment and do not put the country’s financial stability at risk, though if the growth rate is not corrected, it is possible that they might eventually do so. In the face of these conditions, there is no point in denying the urgency to establish new mechanisms to regulate debt processes. The question is up to how much and, in any case, how it will be done.
By taking as basis the scenarios that may result as a consequence of the reform, it is possible to foresee two major trends: the first, in which local institutions are strengthened in the supervision of their own debts, and the other, in which debt is controlled from the center. The country’s federal model would call for the strengthening of counterweights and local controls. Nevertheless, abuses of state and municipal governments have favored the notion that solution is dependent of centralization. Within this logic, the multiplicity of legislation and absence of homogenous criteria derived from federalism as debt enablers is attacked. Thus, the trend is to end up attributing the Chamber of Deputies with the ability to supervise debt that local governments acquire. If this too happens, it is also very likely that specialized institutions such as the Secretariat of Finance and Public Credit might be involved. Here is where the problem lies, given that if it’s decided to provide federal institutions, especially those linked with Executive Power, with too much power of decision, reconstructing a centralization model when taking financial decisions with large political consequences is certainly a possibility. The challenge for legislators consists in finding the right balance between protecting the federalist model and establishing regulation that enable to attack the local government’s discretion. This is not a fanatical plea in favor of federalism, but for state authorities to assume their responsibilities and federal government to cease acting as a “lifeline” guarantee in spite of abuses perpetrated, mainly, by Governors. It might be a good idea to start with the recollection issue: debt states would be paid with local taxes, which would force a Governor to be held accountable in front of the population who would, theoretically, benefit from investments made with the acquired debt.
CIDAC
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