1 Enhancing fiscal governance IMAD Policy Workshop FISCAL CONSOLIDATION, POLICY FRAMEWORK, AND...

1

Enhancing fiscal governance

IMAD Policy Workshop FISCAL CONSOLIDATION,

POLICY FRAMEWORK, AND GOVERNANCE Ljubljana, 20 June 2011

Anna IaraEuropean Commission, DG ECFIN

Fiscal governance and fiscal statistics

2Enhancing fiscal governance

Outline

Fiscal governance frameworks definition why relevant? Insights from empirical research

Fiscal governance in EU Members

Enhancing fiscal governance in the EU Council directive on requirements for budgetary frameworks of the Member States national fiscal frameworks: regular assessment and peer review

Enhancing fiscal governance: considerations for Slovenia


Fiscal governance framework: definition

Rules, regulations and procedures that influence how budgetarypolicy is planned, approved, carried out, and monitored Budgetary accounting systems Processes to draft and adopt the budget Numerical fiscal rules Preparation of macroeconomic and budgetary forecasts Expenditure control Multi-annual budgetary planning Etc.


Fiscal governance: insights from empirical research

Numerical fiscal rules I

US experience provides insights for EMU(von Hagen, 1991; Eichengreen and Bayoumi, 1994; Alesina and Bayoumi, 1996; Bohn and Inman, 1996)

Effectiveness of fiscal rules depends on their design…… on enforcement mechanisms (Inman, 1996; Ayuso-i-Casals et al., 2009)… on type of rule: budget balance and debt rules are especially useful (Debrun et al., 2008) … expenditure rules also have merits – consolidation (Guichard et al., 2007); reduced pro-cyclicality (Holm-Hadulla et al., 2010)

Beneficial effects of fiscal rules…… by and large, improve fiscal performance (Lagona and Padovano, 2007)… support fiscal consolidations (Guichard et al., 2007; Larch and Turrini, 2008)… foster compliance with medium-term plans (von Hagen, 2010)… reduce the price of public debt (Iara and Wolff, 2010)



Numerical fiscal rules II

But also, less positive: foster circumventing…… US (Eichengreen, 1990; von Hagen, 1991; Kiwiet and Szakalay, 1996; Strauch, 1998)

… EU (von Hagen and Wolff, 2006; Buti et al., 2006)

Effect on macroeconomic volatility: unclear… rules foster procyclicality (Poterba, 1994)… rules limit discretionary policies i.e. unnecessary fluctuations (Fatas and Mihov, 2003)… expenditure rules reduce pro-cyclical bias (Holm-Hadulla et al., 2010)

Are rules effective by themselves? Evidence for mere signalling pre-existing commitment (Debrun and Kumar, 2007; Debrun, 2007; Wierts, 2007; Debrun et al., 2008)



Other aspects of fiscal governance

Fiscal councils contribute to the emergence of fiscal rules or their effective enforcement (Debrun, 2007)

Centralised budget process leads to better fiscal outcomes…… EU (von Hagen, 1992, von Hagen and Harden, 1994; de Haan and Sturm, 1994; Hallerberg and von Hagen, 1998; Hallerberg et al., 2007) … CEEC (Gleich, 2002; Yläoutinen, 2004a; 2004b) … Latin America (Alesina et al., 1999; Stein et al., 1999)… Asia (Lao-Araya, 1997)… US states (Strauch, 1998)

Appropriate arrangements to overcome fragmented fiscal decision-making…… enforce fiscal discipline (Hallerberg et al., 2007) … result in lower sovereign risk premia (Hallerberg and Wolff, 2008)



Recent reviews by DG Ecfin

Lessons for fiscal framework reforms

Public Finances in EMU – 2010

Fiscal governance reforms: analysis of information contained in Stability and Convergence ProgrammesAyuso Casals, 2010

Fiscal governance in EU members 2009


How to stick to medium-term budgetary plans


First overview of fiscal governance in EU Members using the special ECFIN dataset


8

Fiscal governance in the EU Members

Enhancing fiscal goovernance



Number of numerical fiscal rules in the EU Members by type,1990-2009

0

10

20

30

40

50

60

70

80

1990 1995 2000 2005 2008 2009

Revenue rule

Debt rule

Expenditure rule

Budget balance rule

13

27

46

62

6863

11Fiscal governance in the EU

Fiscal governance in the EU Members at present

Characteristics of medium-term budgetary frameworks in the EU members, 2008 and 2009

Fiscal governance in the EU Member States

0

2

4

6

8

10

12

14

16

18

20

Yes No Yes No Yes No End of the period Before end of the period

Ex ante coordination when setting budgetary targets

Formal monitoring of budgetary targets (regular reports)

Corrective mechanisms (pre-defined or not)

Revision of medium-term expenditure targets

Number of countries 2008

2009

12


The Fiscal rule index statutory base room for adjusting objectives bodies in charge of monitoring and enforcing compliance enforcement mechanisms media visibility

The Medium-term budgetary framework index existence of domestic MTBF connectedness between multi-annual budgetary targets and the preparation of the annual budget involvement of parliaments in the preparation of medium-term budgetary plans co-ordination between sectors of general government prior to setting the medium-term budgetary targets monitoring mechanisms of multi-annual budgetary targets

Enhancing fiscal goovernance



Strengh of numerical fiscal rules in the EU Members, 1990-2009

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

FRI

EU-27 EU-15

EA-16 EU-12

14Fiscal governance in the EU

Fiscal governance in the EU Members at present

Strength of medium-term budgetary frameworks in the EU members, 2008 and 2009

0.0

0.5

1.0

1.5

2.0

EU

-27

AT

ES FI

NL

FR

DK IT SE

UK

CZ

BE

DE SI

MT

SK LT EE

RO LV PL

BG IE LU CY

EL

PT

HU

MT

BF

ind

ex

sco

re

2008 2009

Fiscal governance in the EU Member States



CY EL

MT

PT

IE

AT

RO

IT

LV

SK

FI

HUSI

CZ

BE

FR

LU

DE

PL

SE

DK

EE

NL

ESLT

UK

BG

-2

-1.5

-1

-0.5

0

0.5

1

1.5

-1.5 -1 -0.5 0 0.5 1 1.5 2 2.5

Fiscal rule index (standardised), 2009

MT

BF

in

dex

(st

and

ard

ised

), 2

009


Part of the 09/2010 Commission legislative proposal on economic governance

Motivation considerable variation in quality of fiscal governance across EU Members well-designed fiscal frameworks substantially contribute to sound fiscal policies EU budgetary framework is insufficiently entrenched in national structures that shape budgetary policies

Legal basisto ensure the effectiveness of the [EDP…] the Member States shall ensure that national procedures in the budgetary area enable them to meet their obligations in this area deriving from these Treaties. […]“ Art. 126(14) with Art. 3 of Treaty Protocol No 12 (EDP)

Council directive on requirements for budgetary frameworks of the Member States


Council directive on requirements for budgetary frameworks of the Member States

Coverage accounting and statistics forecasts numerical fiscal rules medium-term budgetary frameworks transparency of general government finance and comprehensive scope of budgetary frameworks

Binding requirements, choice of instruments left to Members

Transposition until end-2013


Budgetary frameworks directive

Accounting and statistics

Rationale Common accounting practices and comparable high-quality

data are prerequisite to sound national fiscal policies and effective EU surveillance

Provisions Comprehensive accounting system to cover all sub-sectors

of general government Quick monthly availability of cash-based data for central and

regional government and social security - quarterly for local authorities

Transparent methodology of conversion to ESA95; transposition table



Forecasts

Rationale Biased macroeconomic and budgetary forecasts alter “true and

fair” presentation of budgets; source of budgetary slippages More transparent budgetary planning necessary to foster

accountability of governments

Provisions Budgetary planning be based on the most likely/prudent

macro-fiscal scenario Significant differences against Commission forecasts be

explained Consider alternative macro and budgetary scenarios Forecast methodologies and parameters be disclosed



Numerical fiscal rules

Rationale Ample evidence that well-designed numerical fiscal rules

enhance budgetary discipline

Provisions Member s to have in place fiscal rules that effectively promote

compliance with the Treaty obligations (reference values for deficit and debt for general government)

Design features : target definition, scope, effective monitoring provisions, consequences of non-compliance

Annual budget legislation to reflect implied constraints



Medium-term budgetary frameworks (MTBFs)

Rationale

Implications of most fiscal measures go beyond the yearly cycle – multi-annual budgetary planning enhances quality

Stability and Growth Pact requirements: medium-term objective, annual multi-year stability and convergence programmes

Provisions

Members shall establish a MTBF of at least 3 years

Design features : comprehensive; include projections of major expenditure and revenue items based

Emphasis on consistency: (i) with numerical fiscal rules; (ii) with annual budget process - MTBF projections to constitute basis for budget preparation



Transparency; comprehensive scope of budgetary frameworks

Rationale Transparency of fiscal operations is key for effective monitoring

of budget execution Common SGP targets apply to all general government sub-

sectors

Provisions Need for internal coordination and clear allocation of tasks

across general government sub-sectors Planning, forecasts, fiscal rules, MTBFs to cover all sub-sectors Extra-budgetary funds be documented in annual budgets Detailed information on tax expenditures and contingent

liabilities


Two-tier approach to improving fiscal governance in EU Members

05/2010 Council conclusions call for “regular assessment and peer review” of Members’ fiscal governance frameworks

Two-tier approach: (1) directive: binding minimum requirements(2) peer review: non-binding lessons from best practice acknowledged by van Rompuy TF, 10/2010


Regular assessment and peer review

Desirable features of fiscal governance frameworks Comprehensive approach Rules-based frameworks Medium-term perspective Important role for independent institutions Centralised budget process Strong political commitment Regular evaluation and upgrading



Examples of best practice: NL, SE, AT

The Netherlands Real expenditure ceilings for the entire government period Full automatic stabilisation on revenue side Independent forecasting agency: CPB Political ownership; periodic evaluation and improvement

Sweden Surplus target for total government

– expenditure ceiling for central government– balance requirement on local governments

Stringent budget process: strong FinMin, top-down budgeting External monitoring of compliance by Fiscal Policy Council

Austria Internal Stability Pact between sectors of government

– 4-year, deficit/surplus targets Medium-term expenditure framework at federal level Independent macro forecasts: WIFO



Main areas of policy advice Introduce/improve MTBF Introduce/improve fiscal rules Introduce/improve functioning of fiscal councils Improve monitoring procedures of budget execution

The process National fiscal governance frameworks are being reviewed in

the Economic Policy Committee (EPC) 2011: all countries covered in two turns

priority assessment of countries with institutional weaknesses Country-specific policy advice given by ECFIN as appropriate


.... in Slovenia

Main elements of the fiscal governance framework Fiscal rules

40% debt ceiling for general government limits on borrowing by local governments

New multi-annual rule linking nominal expenditure growth to potential growth

Medium-term budgetary framework 3-year rolling framework for central & local governments and social security extension to 5 years and strengthening underway

Independent fiscal institutions IMAD: macroeconomic forecasts for budgetary planning Fiscal Council: independent analysis of budgetary policies

Other budgetary procedures since 2011, performance-based budgeting


.... in Slovenia

Overall : positive Quality of rules-based fiscal governance and medium-term

budgetary framework above average Also positive in terms of fiscal performance

Scope for improvement Regular corrective budgets

– biased budgetary forecasts– insufficient expenditure control

Weak enforceability of multi-annual budgetary plans New fiscal rule

– not too much scope for adjustment? – any body (Fiscal Council?) to assess implementation?– details of enforcement mechanisms?

Fiscal Council– adequate resources to fulfil tasks?– questionable independence

Spending inefficiencies (healthcare, education)


Thank you for your attention

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