Session 2: Constraints on Subnational Governments. Luc Eyraud

Transcription

1 Session 2: Constraints on Subnational Governments Luc Eyraud 1

2 Introduction SNG have greater fiscal autonomy in federal than unitary countries Account for larger share of GG More control over tax and expenditure Subnational autonomy is at the heart of the federal contract which may put GG performance at risk Deficit bias Coordination failure Constraints are needed to: Enforce and signal fiscal discipline Strengthen coordination/harmonization across government levels 2

3 Overview 1 Typology of subnational constraints 2 Analysis of constraints in 13 federations 3 Comparison with European framework 4 Conclusions 3

4 Typology of Constraints (1) Constraints on fiscal targets (policy) Quantitative targets on revenue, spending, financing aggregates Include fiscal rules Constraints on fiscal procedures Budget formulation: consistent MLT fiscal objectives; shared macro assumptions Budget execution: timely and comprehensive in-year fiscal reporting/monitoring; common formats Ex post: production of consolidated accounts; audit 4

5 Typology of Constraints (2) Constraints can be classified according to the degree of fiscal autonomy left to SNG Fiscal Autonomy = capacity of SNG to set their own fiscal targets and/or procedures Less sub-national autonomy Institutional arrangements More autonomy No formal coordination Direct controls by the center Fiscal rules Cooperative arrangements Pure Market discipline 5

6 Overview 1 Typology of subnational constraints 2 Analysis of constraints in 13 federations 3 Comparison with European framework 4 Conclusions 6

7 13 Federations: Fiscal Targets(1) Fiscal rules are the most common constraint Institutional Arrangements: Type and Number Fiscal rule Direct control Cooperative approach Argentina Australia Austria Belgium Brazil Canada Germany India Mexico South Africa Spain Switzerland United States

8 13 Federations: Fiscal Targets(2) About half of the rules are self-imposed by SNG Origin of Fiscal Rules on Subnational Governments 49% 51% Self-imposed/Negotiated Imposed by higher level 8

9 13 Federations: Fiscal Targets(3) Market discipline is somewhat different from institutional constraints More difficult to quantify Broader scope On top of other constraints Pure market-based discipline is atypical. Coexistence of market and institutional controls 9

10 13 Federations: Fiscal Targets(4) Fiscal aggregate targeted by the constraint Budget balance constraints more prevalent and growing, including cyclically-adjusted Limits on debt and borrowing also common Overall balance Fiscal Balance Borrowing Debt Expenditure Revenue Golden rule Structural balance Debt stock Debt service Aggregate Subcomponent Tax ceiling Argentina x x x Australia x X x x Austria X x Belgium x Brazil X x x Canada x X x x Germany x x X India x x x x Mexico x South Africa x x Spain x x x x x Switzerland x x x x United States x x x x x x 10

11 13 Federations: Fiscal Targets(5) Mechanisms to deal with non-compliance Escape clauses for exceptional events (macro shocks, emergency, natural disasters) Financial and administrative sanctions Range of corrective actions: from justification (Australia) to borrowing restrictions (Belgium, India), rebalancing plans (Germany) and placing regions under central administration (Spain) 11

12 13 Federations: Procedures In federations, sound fiscal management requires coordinating/harmonizing budgeting practices across government units and levels In practice, various forms of coordination Formal vs. informal; negotiated vs. non-concerted; fragmented vs. fully harmonized; top-down vs. bottom-up Overall, few federations have common guidelines for budget formulation, reporting and audit Harmonization most limited at early stage of budget cycle 12

13 13 Federations: Coordination Institutions Intergovernmental fiscal bodies Present in most federations Formal mechanism of fiscal coordination across jurisdictions and government levels Used for policy and procedures Several models Bodies supporting the distribution of fiscal targets Bodies in charge of monitoring Bodies focusing on revenue sharing/transfers Bodies tasked with harmonizing budget processes 13

14 Overview 1 Typology of subnational constraints 2 Analysis of constraints in 13 federations 3 Comparison with European framework 4 Conclusions 14

15 Number of federations Europe: Constraints on Fiscal Targets (1) 5 main distinguishing features: (1) Federations tend to impose a smaller set of rules: 5 rules in Europe (deficit, debt, expenditure, MTO, structural BBR) vs. 2 on average in federations Number of constraints 15

16 Europe: Constraints on Fiscal Targets (2) (2) Multi-step approach of EU rules Breach Insufficient effort 3 percent deficit rule Structural effort of 0.5 percent of GDP per year Financial sanction, closer surveillance Medium term objective Structural effort of 0.5 percent of GDP per year Financial sanction 60 percent debt rule Reduction of gap by 1/20 th per year Financial sanction, EDP 16

17 Europe: Constraints on Fiscal Targets (3) (3) Supranational requirements enshrined in national legislation (4) Subsidiarity principle: EU rules apply to GG, with countries responsible for distributing the targets internally (5) Less stringent enforcement mechanisms Financial sanctions only apply to euro-area member states Sanctions are relatively mild compared to federations Corrective actions are weaker; no direct controls 17

18 Europe: Constraints on Procedures Several forms of coordination at European level Fiscal planning (stability and convergence programs) Fiscal policy coordination (ECOFIN council) Statistical reporting but there is room for greater harmonization European institutions perform mostly a reviewer/consultative role Recent reforms: minimum requirements for national budgetary frameworks (six pack); review of draft budgets for euro area member states & enhanced monitoring of euro-area member states under EDP (two pack) Not so different from federations practices: difficult to impose common procedures to members of a fiscal union 18

19 Overview 1 Typology of subnational constraints 2 Analysis of constraints in 13 federations 3 Comparison with European framework 4 Conclusions 19

20 Conclusions Common feature of all fiscal unions: constraints imposed on member states fiscal policy and, to some extent, on procedures European fiscal framework vs. 13 federations Some similarities: reliance on fiscal rules; incomplete harmonization of fiscal procedures Some differences: larger set of constraints; subsidiarity; enforcement mechanisms are less stringent 20

21 Thank You! 21