1 Enhancing fiscal governance IMAD Policy Workshop FISCAL CONSOLIDATION, POLICY FRAMEWORK, AND...
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Transcript of 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
3Enhancing fiscal governance
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.
4Enhancing 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)
5Enhancing 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 pre-existing commitment (Debrun and Kumar, 2007; Debrun, 2007; Wierts, 2007; Debrun et al., 2008)
6Enhancing 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 decision-making…… enforce fiscal discipline (Hallerberg et al., 2007) … result in lower sovereign risk premia (Hallerberg and Wolff, 2008)
7Enhancing 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 ProgrammesAyuso 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
10Enhancing fiscal governance
Fiscal governance in the EU Members
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
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
Enhancing fiscal goovernance
13Enhancing fiscal governance
Fiscal governance in the EU Members
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
15Enhancing fiscal governance
Fiscal governance in the EU Members
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
16Enhancing fiscal governance
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
17Enhancing fiscal governance
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
18Enhancing 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
19Enhancing 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
20Enhancing 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
21Enhancing fiscal governance
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
22Enhancing fiscal governance
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 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
23Enhancing 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
24Enhancing fiscal governance
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
25Enhancing 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
26Enhancing fiscal governance
Regular assessment and peer review
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
27Enhancing 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
28Enhancing 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)