The National Stability Pact in Italy

1. The National Stability Pact in Italy Chiara Goretti (Italian Senate) Gelsomina Vigliotti (Italian Treasury) Practitioners’ Forum , 30-31 March 2006, LSE: ‘Policy learning and experimentation in EU economic governance’

2. EMU and re-evaluation of central-local fiscal relationship In the 90s, two major forces at work: • fiscal consolidation: sound public finances are key to the success of the single currency • decentralisation: a strong centralised public sector is not likely to be optimal

3. The Stability and Growth Pact and decentralisation: potential conflicts • Free rider local governments • Counter cyclical policy action • Local government capital expenditure financing

4. Allocation of policy responsibilities • A variety of approaches have been followed by the EU countries • Most countries rely on co-operation mechanisms • Difficult to single out common features but: - generally no predefined sanctions - the smaller the government level the smaller the cyclical sensitivity of budgets

5. The Italian case • Effective decentralisation is quite recent • Up to early 90s, decentralisation of expenditure has combined with high centralisation of revenues • Local own revenues to GDP grew from 2.8% in 1990 to 8% in 2003. Expenditure stood at around 15%

6. Italy: Main steps to regional fiscal decentralization 1948: The Constitution foresees the creation of regions; special powers are granted to five special statute regions. 1972-1977: “Ordinary statute” regions are set up. 1978: Health expenditure is largely decentralized to regions. 1992: Health service contributions and automobile taxes are attributed to regions. 1995: Specific state transfers are abolished and replaced by a share of the excise on gasoline: a new equalization fund is set up. 1997: A new tax on productive activities (IRAP) is introduced and assigned to regions. 1998: A surcharge on the personal income tax (IRPEF), by 0.5 percentage points, is introduced 2000: Legislative decree 56 replaces central transfers with tax revenue sharing (the most significant share is based on a time-varying formula for VAT to be assigned to regions). 2001: Law 3/2001 reforms Title V of the Constitution; a national vote ratifies it in October.

7. The National Stability Pact (NSP) • Introduced in 1999; 7 years experience; • Each year brought changes in the rules: • From budget balances to expenditures • From current expenditure to total expenditure • Regulates: • Regions, excluded health expenditure • Provinces • Municipalities

8. The rules • Ex post targets on • ad hoc calculated balance (1999-2004) • expenditure, cash and commitments (2005-2006) • Three year planning (...in theory...), introduced in 2002 • Quarterly cash targets, forecasts in line with annual target, introduced 2003

9. The targets: on budget balances 1999-2004 Changes in definition and measure in each year i.e.: the 2002 target for provinces and municipalities • 2002 balance ≤ 2000 balance x (1 + 2,5%) • Balance = Total revenues (net: financial revenues, state transfers, extraordinary revenues) minus Current expenditure (net: interest, non-discretional expenditures, extraordinary expenditures)

10. The targets: on expenditure 2005 exp2005≤ expavg(2001/2003) x (1 + 11,5%) if virtuous exp2005≤ expavg(2001/2003) x (1 + 10%) if not virtuous on total expenditure, net: Personnel expenditure Financial expenditure Transfers to other authorities Minor items

11. The targets: on expenditure 2006 Two separate targets • current expenditure, net: Social expenditure Personnel expenditure Interests Catastrophe and emergency exp. Transfers to other authorities Minor items exp2006≤ exp2004 x (1-6,5%) if virtuous exp2006≤ exp2004 x (1-8%) if not virtuous • capital expenditure More capital exp. in the limits of: • Additional savings in current exp. • Gifts and donations exp2006 ≤ exp2004 x (1+8,1%)

12. The targets: comments on definition • pro-cyclical effects • weak consolidation process • financial autonomy denied • recourse to the Constitutional Court • On budget balances? • On expenditure?

13. The targets: comments on definition • How to define the target? • What should be excluded/included? • Complexity • Proximity to SGP deficit definition • Include capital expenditure or not ? • Volatility • Squeezability

14. Sanctions ... Initially, NSP without sanctions, merely a policy statement “...in case of EU sanctions for excessive deficit against Italy, the fine will be shared among responsible authorities.” Specific sanctions in case of missed annual targets introduced in 2003 • Ban on new hiring; • Mandatory reduction in expenditure for intermediate consumption to reach prescribed level; • Ban on activating new loans; If quarterly target is missed, difference must be absorbed before the end of the following quarter

15. ... incentives ... • In 2000 alone, incentive given through reduced interest rates on loans granted by public Savings and Loan Institute; • In 2002, redistribution of revenues of sanctions levied on others; attempt failed

16. ... monitoring and control Monitoring within the year Following format prepared by Ministry of Economy, authorities required to send information quarterly to: • Ministry of Economy; • Associations of municipalities and of provinces • State Audit Office Beginning in 2003, Board of Auditors - once budget is closed - verifies compliance with targets. Failure to respect target is reported to: • Authority in default • Ministry of Interior • Associations of municipalities and of provinces

17. Incentives or sanctions? • Carrot or stick? Incentives are costly Sanctions should be credible • Which type of sanctions? financial sanctions administrative sanctions state take-over of specific powers Reputation effects

18. Accountability and controls: comments • Ministry of Economy • Associations of municipalities and of provinces • Audit Office • Parliament • Who are the controllers? • How to control? • How to build accountability? • IT database (SIOPE) • internal-external control coordination • coordination and simplification of supplementary information required • peer pressure and reputation effects • involve associations in monitoring and evaluation • transparency • promote ownership within local authority

19. Transparency Transparency inadequate because: • Insufficient information available (planning data and outturns not made public) • Focus on single authorities, with aggregate view neglected • Insufficient connection between NSP data and others public finance information

20. Medium-term Planning Procedures Nov-Dec 30 June 30 Sept Economic and Financial Planning Document General Gvt target Stability Program General and Local Gvts targets Budget bill National Stability Pact Regions’ Committee formulates opinions not on aggregate targets

21. Others fiscal rules • The 2001 Constitutional amendment, article 119 states for local budgets: • golden rule • ordinary funding only through own revenues Not implemented • Interest expenditure < 12% revenues • Budget balanced – strict rules in case of bankruptcy

22. Coordination: comments • stronger coordination in budget session • Ex ante definition of sub national figures, agreed and consistent with aggregate targets (DPEF) • NSP transparently consistent with agreed figures • Better information framework for ex-post evaluation • fiscal rules coordination • Implement constitutional article 119 • Local authorities should be on balance, except capital expenditure • Public finance coordination: on overall level of taxation and expenditure?