11

The National Stability Pact The National Stability Pact in Italyin Italy

Chiara Goretti (Chiara Goretti (Italian SenateItalian Senate))

Gelsomina Vigliotti (Gelsomina Vigliotti (Italian TreasuryItalian Treasury))

Practitioners’ Forum , 30-31 March 2006, LSE: Practitioners’ Forum , 30-31 March 2006, LSE:

‘‘Policy learning and experimentation in EU economic Policy learning and experimentation in EU economic governance’governance’

22

EMU and re-evaluation of EMU and re-evaluation of central-local fiscal relationshipcentral-local fiscal relationship

In the 90s, two major forces at work:In the 90s, two major forces at work:

fiscal consolidation: sound public fiscal consolidation: sound public finances are key to the success of finances are key to the success of the single currencythe single currency

decentralisation: a strong decentralisation: a strong centralised public sector is not likely centralised public sector is not likely to be optimal to be optimal

33

The Stability and Growth Pact The Stability and Growth Pact and decentralisation: potential and decentralisation: potential

conflictsconflicts

Free rider local governmentsFree rider local governments

Counter cyclical policy actionCounter cyclical policy action

Local government capital Local government capital expenditure financingexpenditure financing

44

Allocation of policy Allocation of policy responsibilitiesresponsibilities

A variety of approaches have been followed A variety of approaches have been followed by the EU countriesby the EU countries

Most countries rely on co-operation Most countries rely on co-operation mechanismsmechanisms

Difficult to single out common features but:Difficult to single out common features but:

- generally no predefined sanctions- generally no predefined sanctions

- the smaller the government level the - the smaller the government level the smaller the cyclical sensitivity of smaller the cyclical sensitivity of budgets budgets

55

The Italian caseThe Italian case

Effective decentralisation is quite recentEffective decentralisation is quite recent

Up to early 90s, decentralisation of Up to early 90s, decentralisation of expenditure has combined with high expenditure has combined with high centralisation of revenuescentralisation of revenues

Local own revenues to GDP grew from Local own revenues to GDP grew from 2.8% in 1990 to 8% in 2003. Expenditure 2.8% in 1990 to 8% in 2003. Expenditure stood at around 15%stood at around 15%

66

Italy: Main steps to regional fiscal Italy: Main steps to regional fiscal decentralizationdecentralization

19481948: The Constitution foresees the creation of regions; special powers are : The Constitution foresees the creation of regions; special powers are granted to five special statute regions.granted to five special statute regions.

1972-19771972-1977: “Ordinary statute” regions are set up.: “Ordinary statute” regions are set up.

19781978: Health expenditure is largely decentralized to regions.: Health expenditure is largely decentralized to regions.

19921992: Health service contributions and automobile taxes are attributed to : Health service contributions and automobile taxes are attributed to regions.regions.

19951995: Specific state transfers are abolished and replaced by a share of the excise : Specific state transfers are abolished and replaced by a share of the excise on gasoline: a new equalization fund is set up.on gasoline: a new equalization fund is set up.

19971997: A new tax on productive activities (IRAP) is introduced and assigned to : A new tax on productive activities (IRAP) is introduced and assigned to regions.regions.

19981998: A surcharge on the personal income tax (IRPEF), by 0.5 percentage points, : A surcharge on the personal income tax (IRPEF), by 0.5 percentage points, is introduced is introduced

20002000: Legislative decree 56 replaces central transfers with tax revenue sharing : 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 (the most significant share is based on a time-varying formula for VAT to be assigned to regions).assigned to regions).

20012001: Law 3/2001 reforms Title V of the Constitution; a national vote ratifies it in : Law 3/2001 reforms Title V of the Constitution; a national vote ratifies it in October.October.

77

The National Stability Pact The National Stability Pact (NSP)(NSP)

Introduced in 1999; 7 years experience;Introduced in 1999; 7 years experience;

Each year brought changes in the rules:Each year brought changes in the rules: From budget balances to expendituresFrom budget balances to expenditures From current expenditure to total expenditureFrom current expenditure to total expenditure

Regulates:Regulates: Regions, excluded health expenditureRegions, excluded health expenditure ProvincesProvinces MunicipalitiesMunicipalities

88

The rulesThe rules

Ex post targets on Ex post targets on ad hoc calculated balance (1999-2004)ad hoc calculated balance (1999-2004) expenditure, cash and commitments expenditure, cash and commitments

(2005-2006)(2005-2006)

Three year planning (...in theory...), Three year planning (...in theory...), introduced in 2002introduced in 2002

Quarterly cash targets, forecasts in line Quarterly cash targets, forecasts in line with annual target, introduced 2003 with annual target, introduced 2003

99

The targets: on budget balancesThe targets: on budget balances1999-2004 1999-2004 Changes in definition and measure in each yearChanges in definition and measure in each year

i.e.: the 2002 target for provinces and i.e.: the 2002 target for provinces and municipalitiesmunicipalities

2002 balance 2002 balance ≤≤ 2000 balance x (1 + 2,5%) 2000 balance x (1 + 2,5%)

Balance = Balance = Total revenues (net: financial revenues, state Total revenues (net: financial revenues, state transfers, extraordinary revenues)transfers, extraordinary revenues)

minusminus

Current expenditure (net: interest, non-Current expenditure (net: interest, non-discretional expenditures, extraordinary discretional expenditures, extraordinary expenditures) expenditures)

1010

The targets: on expenditure 2005The targets: on expenditure 2005

expexp20052005 ≤≤ exp expavg(2001/2003)avg(2001/2003) x (1 + 11,5%) x (1 + 11,5%) if virtuousif virtuous

expexp20052005 ≤≤ exp expavg(2001/2003)avg(2001/2003) x (1 + 10%) x (1 + 10%) if not virtuousif not virtuous

on total expenditure, on total expenditure, net:net:

Personnel expenditurePersonnel expenditure

Financial expenditureFinancial expenditure

Transfers to other Transfers to other authoritiesauthorities

Minor itemsMinor items

1111

The targets: on expenditure The targets: on expenditure 20062006

expexp20062006 ≤≤ exp exp20042004 x (1-6,5%) x (1-6,5%) if virtuousif virtuous

expexp20062006 ≤≤ exp exp20042004 x (1-8%) x (1-8%) if not virtuousif not virtuous

Two separate targetsTwo separate targets

current expenditure, current expenditure, net:net:

exp2006 ≤ exp2004 x (1+8,1%)

capital expenditurecapital expenditure

Social expenditureSocial expenditure

Personnel expenditurePersonnel expenditure

InterestsInterests

Catastrophe and emergency Catastrophe and emergency exp.exp.

Transfers to other authoritiesTransfers to other authorities

Minor itemsMinor items

More capital exp. in the limits of:More capital exp. in the limits of:

Additional savings in current Additional savings in current exp.exp.

Gifts and donationsGifts and donations

1212

The targets: comments on The targets: comments on definitiondefinition

On budget On budget balances? balances?

On On expenditure?expenditure?

pro-cyclical effectspro-cyclical effects weak consolidation weak consolidation

processprocess

financial autonomy financial autonomy denieddenied

recourse to the recourse to the Constitutional CourtConstitutional Court

1313

The targets: comments on The targets: comments on definitiondefinition

How to define the target? How to define the target? What should be excluded/included?What should be excluded/included? ComplexityComplexity Proximity to SGP deficit definitionProximity to SGP deficit definition

Include capital expenditure or not ?Include capital expenditure or not ? VolatilityVolatility SqueezabilitySqueezability

1414

Sanctions ...Sanctions ...Initially, NSP without sanctions, merely a policy Initially, NSP without sanctions, merely a policy

statement statement

““......in case of EU sanctions for excessive deficit in case of EU sanctions for excessive deficit against Italy, the fine will be shared among against Italy, the fine will be shared among responsible authorities.”responsible authorities.”

Specific sanctions in case of missed annual targets Specific sanctions in case of missed annual targets introduced in 2003 introduced in 2003

Ban on new hiring;Ban on new hiring; Mandatory reduction in expenditure for intermediate Mandatory reduction in expenditure for intermediate

consumption to reach prescribed level;consumption to reach prescribed level; Ban on activating new loans;Ban on activating new loans;

If quarterly target is missed, difference must be If quarterly target is missed, difference must be absorbed before the end of the following quarterabsorbed before the end of the following quarter

1515

... incentives ...... incentives ...

In 2000 alone, incentive given In 2000 alone, incentive given through reduced interest rates on through reduced interest rates on loans granted by public Savings and loans granted by public Savings and Loan Institute; Loan Institute;

In 2002, redistribution of revenues of In 2002, redistribution of revenues of sanctions levied on others; attempt sanctions levied on others; attempt failedfailed

1616

... monitoring and control... monitoring and controlMonitoring within the yearMonitoring within the yearFollowing format prepared by Ministry of Economy, Following format prepared by Ministry of Economy,

authorities required to send information quarterly to:authorities required to send information quarterly to: Ministry of Economy;Ministry of Economy; Associations of municipalities and of provincesAssociations of municipalities and of provinces State Audit OfficeState Audit Office

Beginning in 2003, Board of Auditors - once budget is Beginning in 2003, Board of Auditors - once budget is closed - verifies compliance with targets. Failure to closed - verifies compliance with targets. Failure to respect target is reported to:respect target is reported to:

Authority in defaultAuthority in default Ministry of InteriorMinistry of Interior Associations of municipalities and of provincesAssociations of municipalities and of provinces

1717

Incentives or sanctions?Incentives or sanctions?

Carrot or stick?Carrot or stick?Incentives are costly Incentives are costly Sanctions should be credibleSanctions should be credible

Which type of sanctions?Which type of sanctions?financial sanctionsfinancial sanctionsadministrative sanctionsadministrative sanctionsstate take-over of specific powers state take-over of specific powers Reputation effectsReputation effects

1818

Accountability and controls: Accountability and controls: comments comments

Who are the Who are the controllers?controllers?

How to control?How to control?

How to build How to build accountability?accountability?

Ministry of Economy Associations of municipalities

and of provinces Audit Office Parliament

IT database (SIOPE) internal-external control coordination coordination and simplification of supplementary information required

peer pressure and reputation effectsinvolve associations in monitoring and evaluation transparency promote ownership within local authority

1919

TransparencyTransparencyTransparency inadequate because:Transparency inadequate because:

Insufficient information available (planning Insufficient information available (planning data and outturns not made public) data and outturns not made public)

Focus on single authorities, with aggregate Focus on single authorities, with aggregate view neglectedview neglected

Insufficient connection between NSP data Insufficient connection between NSP data and others public finance informationand others public finance information

2020

Medium-term Planning ProceduresMedium-term Planning Procedures

Economic and Economic and Financial Financial Planning Planning

DocumentDocumentGeneral GvtGeneral Gvt

targettarget

Stability ProgramStability ProgramGeneral and General and

Local Gvts Local Gvts targetstargets

Budget billBudget billNational National

Stability Pact Stability Pact

Regions’ Committee Regions’ Committee formulates opinionsformulates opinions

not on aggregate targetsnot on aggregate targets

30 June30 June 30 Sept30 Sept Nov-DecNov-Dec

2121

Others fiscal rulesOthers fiscal rules

The 2001 Constitutional amendment, The 2001 Constitutional amendment, article 119 states for local budgets:article 119 states for local budgets: golden rulegolden rule ordinary funding only through own revenuesordinary funding only through own revenues

Not implementedNot implemented

Interest expenditure < 12% revenuesInterest expenditure < 12% revenues

Budget balanced – strict rules in case of Budget balanced – strict rules in case of bankruptcybankruptcy

2222

Coordination: commentsCoordination: comments stronger coordination in budget sessionstronger coordination in budget session

Ex ante definition of sub national figures, Ex ante definition of sub national figures, agreed and consistent with aggregate agreed and consistent with aggregate targets (DPEF)targets (DPEF)

NSP transparently consistent with agreed NSP transparently consistent with agreed figuresfigures

Better information framework for ex-post Better information framework for ex-post evaluationevaluation

fiscal rules coordination fiscal rules coordination Implement constitutional article 119Implement constitutional article 119 Local authorities should be on balance, Local authorities should be on balance,

except capital expenditureexcept capital expenditure Public finance coordination: on overall level Public finance coordination: on overall level

of taxation and expenditure? of taxation and expenditure?