Fiscal governance and Budgetary Outcomes: The case of Greece Georgia Kaplanogou Vassilis T. Rapanos 1 UNIVERSITY OF ATHENS DEPARTMENT OF ECONOMICS
Motivation of the paper Serious fiscal imbalances now facing most euro area countries pose new challenges for policy makers. Particularly in Greece, the question arises about the causes of the severe fiscal crisis that emerged about a year ago. Was it mainly the result of the high 2009 deficit figure? Why did the alarming size of the deficit became known as late as October? 2
Figure 1: Main elements of domestic fiscal frameworks. "Basics" of Domestic Fiscal Frameworks Common standardised accounting practices for all government tiers Reliable macro and fiscal statistics and regular availability Comprehensiveness of the budget process Regular and timely monitoring of main expenditure and revenue categories Others Numerical Fiscal Rules Independent Public Institutions Medium-Term Budgetary Frameworks Budgetary Procedures 3
A short story of Greek public finances since 1999 During the 1993-1999 period, Greece, in its effort to join the Eurozone, made considerable progress in reducing its deficit. Indeed, the budget deficit, from 13% of GDP in 1993, was reduced to below 3% by 1999, while the public debt-to-gdp ratio started declining. After the introduction of the euro, fiscal consolidation efforts lost momentum. In fact, the period 2001-2003 witnessed significant increases in budget deficits. The deficit for 1999 was revised to 3.1% after a fiscal audit that took place in 2004. 4
Annual changes in the general government balance (% of GDP), (2000-2009) A nnual change as a % of G DP 3,0 2,0 1,0 0,0-1,0-2,0-3,0-4,0-5,0-6,0-7,0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Greece Euro area average (EU-12) 5
What fiscal data is presented to and approved by the Greek Parliament? The fiscal data for a given year are presented to the Greek Parliament three times. Take the example of 2009 data. What is presented? When is it presented? Target for 2009 November 2008 Within-year estimate of 2009 (provisional estimate) November 2009 Final outcome for 2009 November 2010 6
Is the Greek Parliament presented with reliable targets? What are the deviations Between targets and within-year estimates, and Between within-year estimates and final outcomes? 7
Deviations of within-year estimates of major fiscal aggregates from the targets set at the Introductory Report of the State Budget, 1999-2008 (excluding "outlier" 2009) 4.000 3.000 2.000 million euros 1.000 0-1.000-2.000-3.000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Average 1999-2008 Average 2001-2008 8 Revenues Primary Expenditure Interest payments
Deviations of within-year estimates of major fiscal aggregates from the targets set at the Introductory Report of the State Budget, 1999-2009 5.000 million euros 0-5.000-10.000-15.000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Average 1999-2009 Average 2001-2009 Revenues Primary Expenditure Interest payments 9
Deviations of within-year estimates of major fiscal aggregates from final outcomes, 1999-2009 1.500 1.000 500 0 million euros -500-1.000-1.500-2.000-2.500-3.000-3.500 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Average 1999-2009 Average 2001-2009 10 Revenues Primary Expenditure Interest payments
% deviations of major fiscal aggregates of the State Budget (average 2001-2009) 3% 2% 1% 0% -1% -2% -3% -4% -5% -6% -7% -3,8% -2,4% Revenues 0,4% 2,4% Primary Expenditure 1,0% 0,0% Interest payments Percentage deviations of final outcomes from withinyear estimates Percentage deviations of within-year estimates from budget targets 11
Deviations of final outcomes of major fiscal aggregates from targets set at the Hellenic Stability and Growth Programmes 10.000 5.000 0 million euros -5.000-10.000-15.000 12-20.000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Average 2001- General Government Revenues 2009 General Government Primary Expenditures General Government Interest Payments
Deviations of final outcomes of major fiscal aggregates from the targets set at the Hellenic Stability and Growth Programmes (excluding the impact of ex-post statistical revisions) 10.000 5.000 0 million euros -5.000-10.000-15.000 13-20.000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Average 2001- General Government Revenues 2009 General Government Primary Expenditures General Government Interest Payments
Deviations of GDP growth rate (2000 2009) real GDP - Annual growth rate deviation of annual growth rate 0,40 0,30 0,20 0,10 0,00-0,10-0,20-0,30 0,35 Greek Stability Programme of the previous year EC; -0,16 OECD; -0,23 IMF; -0,20 Spring forecast for current year EC; -0,08 OECD; -0,15 IMF; -0,12 Autumn forecast for current year -0,03 First provisional estimate 14
Deviations of General Government balance (% of GDP), 2000-2009 General Government Balance - deviations from final data 5,0 4,6 4,5 Deviation (% of GDP) 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 EC; 3,9 OECD; 3,9 IMF 4,2 EC; 2,8 OECD; 2,7 IMF; 3,8 Greek Stability Programme of the previous year Spring forecast for current year Autumn forecast for current year 15
General Government Balance - deviations from final data (excluding the impact of ex-post statistical revisions) 3,0 2,5 2,5 Deviation (% of GDP ) 2,0 1,5 1,0 0,5 0,0 1 E C; 1,8 OE CD; 1,8 IM F 2,0 E C; 0,6 OECD; 0,6 IM F; 1,7 16
Why are deviations from targets so high? Budget balance targets in Greece were being missed, while on the whole revenue shortfalls and expenditure overruns appear to be equally responsible for missing these targets. The previous analysis has demonstrated that the widely held view that optimistic assumptions on GDP growth are largely responsible for unrealistic forecasts for public revenue and expenditure is not valid in Greece. 17
Why are deviations from targets so high? All these conclusions point to the same direction: the weak institutional framework for setting up and monitoring the execution of the budget is the fundamental reason for the weak fiscal performance Any attempt to correct fiscal imbalances is rather doomed to fail unless the reform of this framework is also given serious thought. 18
Improving PFM in Greece: some proposals: Improve transparency 1. The drafting of two separate budgets (the ordinary and the investment budget), the existence of significant off-budget operations, the lack of coherent reporting of the finances of general government (i.e. local authorities, social security funds and hospitals). 2. Regular information to Parliament about implementation of the Budget. 19
Improving PFM in Greece: some proposals: Improve budgeting procedures Introduce 1. Numerical fiscal rules 2. A national MTBF 3. Top down Budgeting 4. Regular budget reporting 5. Ex post auditing, not just legalistic 6. Performance and effectiveness criteria 7. Annual budgets for all public sector entities 20
Improving PFM in Greece: some proposals: Improve organization Give more autonomy to the General Accounting Office, with a permanent undersecretary as its head. Full computerisation of all transactions and connect on line all offices of public expenditures. Monthly monitoring of all expenditures of central government, local authorities, and public entities. Introduce a new accounting system compatible with the International Public Sector Accounting Standards. Organize a new effective internal auditing system, but also use external auditors. Reduce detail and make the system more flexible. 21
Improving PFM in Greece: Some recent reform efforts In recent years, there have been some attempts to address some of the weaknesses listed above. In 2007 the government attempted to introduce a unified expenditure classification system covering both the ordinary and the investment budgets. In 2008, the Greek government established a Government Budget Reform Unit with the aim of introducing initially at a pilot basis a results oriented program budgeting system, but the progress to date is very limited. 22
Improving PFM in Greece: Some recent reform efforts A new law was voted in August 2010 on Fiscal Management and Responsibility, which introduces a number of important changes, some of which are the following: It introduces a national medium-term budgetary framework for the general government to be approved by the Parliament. A top-down approach is introduced for public expenditure, since ceilings for all levels of general government (and also by Ministry) will be included in the budget on a three-year horizon. 23
Improving PFM in Greece: Some recent reform efforts 24 All bodies of the central government, local authorities and social security organizations (including hospitals) are required to draft annual budgets. They have to communicate to the General Accounting Office, on a monthly basis, reports including data on expenditures, revenue, financing and liabilities, on a cash basis. The General Accounting Office is required to submit to Parliament and make available to the press consolidated reports at a general government level covering public revenue, expenditure, liabilities and financing on a monthly, quarterly and biannual basis.
Improving PFM in Greece: Some recent reform efforts Internal audit procedures for public expenditures are introduced. A double-entry accounting system is introduced for the central administration. A unified expenditure classification system is introduced for all levels of government. The scope for expenditure reallocations is seriously limited. Important changes to the approved budget have to be approved by the Parliament, after the Minister of Finance has submitted a Supplementary Budget. 25
Improving PFM in Greece: Evaluating Law 3871/2010 The scope of the proposed reforms is indeed ambitious, but there are areas of concern: No explicit national fiscal rules are introduced (e.g. expenditure ceilings). Doubts about the degree of commitment to the medium-term targets rolling medium term plans. No provisions are made for the level of borrowing and borrowing procedures of bodies outside central government. What about local authorities or social security funds? Accruals accounting is partly introduced only in the revenue side. Nevertheless, the new Law can be the starting point of a radical reform in PFM in Greece. 26
27 Improving tax administration Greece: Some proposals The large revenue shortfalls can be partly attributed to the poor performance of the tax administration mechanisms and the widespread tax evasion. What can be done? Give more autonomy to the Tax Administration Office, with a permanent undersecretary as its head Reorganise and consolidate tax offices Radically change the tax audit system Reduce the discretion of individual tax officers Stop tax amnesties Create an effective dispute-resolution mechanism Improve the efficiency of the judicial system tax courts should make decisions in a speedier manner
The Greek Parliamentary Budget Office The setting-up of an independent fiscal authority does not automatically imply that its role will be played effectively. Perhaps the best blueprint for an effective independent fiscal council is given by Alice Rivlin, the first director of the Congressional Budget Office of the U.S. She eloquently identifies four aspects on which the acceptance of CBO by the political players rests: 28
The Greek Parliamentary Budget Office 29 It has had strong professional leadership and attracted high quality analytical staff. It has been aggressively non-partisan and never allowed politicians to appoint members of staff. It never makes recommendations on policy matters, but offers estimates of budgetary costs or analysis of options and alternatives. It has always tried to help politicians evaluate their choices and steadfastly refused to tell them how to choose. It makes all of its reports and analyses available to the public and the press and tries hard to make them clear and readable.
The Greek Parliamentary Budget Office In Greece, in July 2010, the government submitted to Parliament a Draft Bill, which envisages the establishment of a Parliamentary Budget Office under the aegis of the Parliament. Establishing such an office is with little doubt a move in the right direction. What Greece lacks today is credibility, not only in its fiscal policy but also in the quality of its fiscal data. Rebuilding confidence is a long process and the Parliamentary Budget Office could play the role of a catalyst in this process. But what are its chances of doing so? 30
The Greek Parliamentary Budget Office The Greek Parliamentary Budget Office belongs administratively to the Secretary General of the Parliament and submits its reports to the Special Standing Committee responsible for examining the Financial Statement and the General Balance Sheet of the State. Its mandate is defined rather generally as collecting information on the State Budget, classifying it in a systematic way, and providing general support to the Parliament work. 31
The Greek Parliamentary Budget Office The Ministry of Finance and other government agencies are required to provide all necessary data. The Parliament is responsible for financing the Office, which will be staffed by 10 members in total with university or high school education. Are there any prospects of success? 32
The Greek Parliamentary Budget Office Its mandate appears rather poor and imprecise. Most importantly, the key requirement for wide publicity of the office s reports is not met. The structure of the office is not clear, neither is the way the staff members will be appointed, while the impression is given that high professional skills, experience and competence, are not an evident requirement. Terms of appointment are not specified and the nonpartisan character of the Office s leadership is also under question. 33
The Greek Parliamentary Budget Office The above criticism is not meant to imply that the Office is doomed to fail. The legal provisions for the creation of the Office do allow sufficient flexibility, for its effectiveness to be enhanced. Issues of critical importance: Choice of a chairman with high professional qualification and independence of mind Recruitment of competent staff Specification of the core functions to be performed The Office s analyses should be accessible to all 34 All these remain to be seen in practice.
Conclusions Institutional weaknesses are a root cause of the Greek fiscal crisis. Recent reforms are encouraging efforts to move forward. Good intentions have to become operational in practice. A lot of progress needs to be done. 35