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Enhancing fiscal governance IMAD Policy Workshop FISCAL CONSOLIDATION, POLICY FRAMEWORK, AND GOVERNANCE Ljubljana, 20 PowerPoint Presentation
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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. 2. Outline.

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Enhancing fiscal governanceIMAD Policy Workshop FISCAL CONSOLIDATION, POLICY FRAMEWORK, AND GOVERNANCE Ljubljana, 20 June 2011

Anna IaraEuropean Commission, DG ECFINFiscal governance and fiscal statistics

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Enhancing fiscal governance

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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 pre-existing 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 decision-making…… 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 reformsPublic Finances in EMU – 2010
  • Fiscal governance reforms: analysis of information contained in Stability and Convergence ProgrammesAyuso Casals, 2010
  • Fiscal governance in EU members 2009Public 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 datasetPublic Finances in EMU – 2006
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Enhancing fiscal goovernance

Fiscal governance in the EU Members

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Enhancing fiscal governance

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Fiscal governance in the EU Members

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

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Fiscal governance in the EU

Fiscal governance in the EU Member States

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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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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

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Fiscal governance in the EU Members

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

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Fiscal governance in the EU

Fiscal governance in the EU Member States

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Fiscal governance in the EU Members at present

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

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Enhancing fiscal governance

Fiscal governance in the EU Members

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Enhancing fiscal governance

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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 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)
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Enhancing 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
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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

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
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Enhancing 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
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Enhancing fiscal governance

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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

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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
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Enhancing fiscal governance

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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

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Thank you for your attention