Transcript No Slide Title

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Enhancing fiscal governance
IMAD Policy Workshop
FISCAL CONSOLIDATION,
POLICY FRAMEWORK, AND GOVERNANCE
Ljubljana, 20 June 2011
Anna Iara
European Commission, DG ECFIN
Fiscal governance and fiscal statistics
Enhancing 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
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Enhancing fiscal governance
Fiscal governance framework: definition
Rules, regulations and procedures that influence how budgetary
policy 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.
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Enhancing fiscal governance
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)
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Enhancing fiscal governance
Fiscal governance: insights from empirical research
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 preexisting commitment (Debrun and Kumar, 2007; Debrun, 2007;
Wierts, 2007; Debrun et al., 2008)
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Enhancing fiscal governance
Fiscal governance: insights from empirical research
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 decisionmaking…
… enforce fiscal discipline (Hallerberg et al., 2007)
… result in lower sovereign risk premia (Hallerberg and Wolff,
2008)
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Enhancing fiscal governance
Fiscal governance: insights from empirical research
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 Programmes
Ayuso Casals, 2010

Fiscal governance in EU members 2009
Public Finances in EMU – 2009

How to stick to medium-term budgetary plans
Public Finances in EMU – 2007

First overview of fiscal governance in EU Members using the
special ECFIN dataset
Public Finances in EMU – 2006
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Enhancing fiscal goovernance
Fiscal governance in the EU Members
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Enhancing fiscal governance
Fiscal governance in the EU Members
Number of numerical fiscal rules in the EU Members by type,
1990-2009
80
70
Revenue rule
68
63
Debt rule
62
Expenditure rule
60
Budget balance rule
50
46
40
30
27
20
13
10
0
1990
1995
2000
2005
2008
2009
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Fiscal governance in the EU Member States
Fiscal governance in the EU Members at present
Characteristics of medium-term budgetary frameworks in the EU
members, 2008 and 2009
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Number of countries
2008
18
2009
16
14
12
10
8
6
4
2
0
Yes
No
Ex ante coordination when setting
budgetary targets
Yes
No
Formal monitoring of budgetary
targets (regular reports)
Yes
No
End of the period Bef ore end of the
period
Corrective mechanisms (pre-defined Revision of medium-term expenditure
or not)
targets
Enhancing fiscal goovernance
Fiscal governance in the EU Members

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
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Enhancing fiscal governance
Fiscal governance in the EU Members
The fiscal rule index (FRI) in the EU-27 and selected groups of member states, 1990 to
2009
Strengh of numerical fiscal rules in the EU Members, 1990-2009
FRI
1.0
0.8
0.6
EU-27
EU-15
EA-16
EU-12
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
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Fiscal governance in the EU Member States
Fiscal governance in the EU Members at present
Strength of medium-term budgetary frameworks in the EU
members, 2008 and 2009
2.0
2008
2009
1.0
0.5
HU
PT
EL
CY
LU
IE
BG
PL
LV
RO
EE
LT
SK
MT
SI
DE
BE
CZ
UK
SE
IT
DK
FR
NL
FI
ES
AT
0.0
EU-27
MTBF index score
1.5
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Enhancing fiscal governance
Fiscal governance in the EU Members
1.5
MTBF index (standardised), 2009
PT
RO 1
MT
-1.5
-1
0.5
0
LV FI
0
-0.5
SI
HU
CZ
SK
LU
ES
LT
EE
FR
DE
DK
BE
0.5
1
1.5
UK
NL
2
-0.5
IT
PL
-1
AT
-1.5
CY
EL
SE
IE
-2
Fiscal rule index (standardised), 2009
BG
2.5
Enhancing fiscal governance
Council directive on requirements for budgetary frameworks
of the Member States

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 basis
to 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)
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Enhancing fiscal governance
Council directive on requirements for budgetary frameworks
of the Member States
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Coverage
 accounting and statistics
 forecasts
 numerical fiscal rules
 medium-term budgetary frameworks
 transparency of general government finance and
comprehensive scope of budgetary frameworks
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Binding requirements, choice of instruments left to Members

Transposition until end-2013
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Enhancing fiscal governance
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
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Enhancing fiscal governance
Budgetary frameworks directive
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
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Enhancing fiscal governance
Budgetary frameworks directive
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
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Enhancing fiscal governance
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Budgetary frameworks directive
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
Enhancing fiscal governance
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Budgetary frameworks directive
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 subsectors
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
Enhancing fiscal governance
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
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Enhancing fiscal governance
Regular assessment and peer review
Desirable features of fiscal governance frameworks

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

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Comprehensive approach
Rules-based frameworks
Medium-term perspective
Important role for independent institutions
Centralised budget process
Strong political commitment
Regular evaluation and upgrading
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Enhancing fiscal governance
Regular assessment and peer review
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
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Enhancing fiscal governance
Regular assessment and peer review
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
Main areas of policy advice
 Introduce/improve MTBF
 Introduce/improve fiscal rules
 Introduce/improve functioning of fiscal councils
 Improve monitoring procedures of budget execution
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Enhancing fiscal governance
.... 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
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Enhancing fiscal governance
.... 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)
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Enhancing fiscal governance
Thank you for your attention
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