Transcript IL PATTO DI STABILITA’ INTERNO - eu

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’
1
EMU and re-evaluation of centrallocal 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
2
The Stability and Growth Pact and
decentralisation: potential conflicts
Free rider local governments
Counter cyclical policy action
Local government capital expenditure
financing
3
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
4
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%
5
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.
6
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
7
The rules

Ex post targets on
ad hoc calculated balance (1999-2004)
 expenditure, cash and commitments (20052006)



Three year planning (...in theory...), introduced
in 2002
Quarterly cash targets, forecasts in line with
annual target, introduced 2003
8
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)
9
The targets: on expenditure 2005
on total expenditure, net:
Personnel expenditure
Financial expenditure
Transfers to other authorities
Minor items
exp2005 ≤ expavg(2001/2003) x (1 + 11,5%) if virtuous
exp2005 ≤ expavg(2001/2003) x (1 + 10%)
if not virtuous
10
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
exp2006 ≤ exp2004 x (1+8,1%)
More capital exp. in the limits of:


Additional savings in current exp.
Gifts and donations
11
The targets: comments on definition

On budget
balances?




On expenditure?

pro-cyclical effects
weak consolidation
process
financial autonomy
denied
recourse to the
Constitutional Court
12
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
13
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
14
... 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
15
... 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
16
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
17
Accountability and controls: comments

Who are the
controllers?
 Ministry of Economy
 Associations of municipalities
and of provinces
 Audit Office
 Parliament


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
18
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
19
Medium-term Planning Procedures Nov-Dec
30 June
30 Sept
Economic and
Financial
Planning
Document
General Gvt
target
Budget bill
National
Stability Pact
Stability Program
General and
Local Gvts
targets
Regions’ Committee
formulates opinions
not on aggregate targets
20
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
21
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?
22