18 Economic governance
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17929/12
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COM(12) 761
| Commission Report: Interim progress report on implementation of Council Directive 2011/85/EU on requirements for budgetary frameworks of the Member States
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| Legal base | —
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| Document originated | 14 December 2012
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| Deposited in Parliament | 21 December 2012
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| Department | HM Treasury
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| Basis of consideration | EM of 15 January 2013
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| Previous Committee Report | None
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| Discussion in Council | None planned
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
18.1 Two elements of the EU's common economic policies are
the Economic and Monetary Union, with the eventual aim that all
Member States would adopt the euro,[71]
and the processes for economic policy coordination under the "Europe
2020" strategy,[72]
including peer group monitoring and encouragement during the annual
European Semester cycle. A third element is the Stability and
Growth Pact.
18.2 In September 2010 the Commission presented
a legislative package, known as the "six pack", to strengthen
economic governance. One of the six resulting legislative acts
was Council Directive 2011/85/EU, which set minimum requirements
for budgetary frameworks to be implemented by Member States by
the end of 2013.[73]
In July eurozone Heads of State and Government called on eurozone
ember States to transpose the Directive by the end of 2012. The
Directive called for the Commission to prepare an interim progress
report on implementation of the main provisions of the Directive
by 14 December 2012.
The document
Introduction
18.3 This is the Commission's interim progress
report called for by Council Directive 2011/85/EU. It is based
on information provided by Member States. In its introduction
the Commission first discusses the Directive itself, saying that:
- it forms an important component
of the "six pack" legislative package on the strengthening
of economic governance; and
- it provided the first opportunity for the EU
to set minimum requirements for budgetary frameworks, providing
legal certainty on top of the country specific recommendations
issued under the European Semester process.
18.4 The Commission continues with an outline
of the definition of a budgetary framework under the Directive,
that is, the set of arrangements, procedures, rules and institutions
that underlie the conduct of budgetary policies of general government,
in particular:
- systems of budgetary accounting
and statistical reporting;
- rules and procedures governing the preparation
of forecasts for budgetary planning;
- country-specific numerical fiscal rules;
- medium-term budgetary frameworks; and
- mechanisms that regulate fiscal relationships
between public authorities across sub-sectors of general government.
18.5 The Commission notes that for each of these
areas the Directive specifies a number of essential standards
that Member States must have transposed by the end of 2013. It
concludes the introduction by saying that the report should not
be considered as a fully-fledged assessment of Member States'
conformity with the Directive — this will be performed following
expiry of the transposition deadline.
18.6 The Commission then considers transposition
so far under five headings, as follows.
Accounting, statistics and transparency provisions
(Chapter II and Article 14 of the Directive)
18.7 The Commission:
- emphasizes the importance of
sound fiscal reporting, stating that comprehensive, timely and
accurate information on budgetary execution is essential for policy-makers;
- outlines historic problems
with fiscal reporting from Member States and that, due to these
problems, the Directive therefore provides a major opportunity
to harmonise accounting conventions within general government,
streamline reporting lines and ensure an effective data feed to
decision-makers and external observers;
- explains that almost all reporting Member States
make monthly accounting data for their central government bodies
available and that at the local level, for which the Directive
requires relatively lower standards, only eleven Member States
report some data;
- reasons that as a consequence of this there is
still a great deal to be done in most Member States for reporting
on non-central government sub-sectors;
- describes how, in parallel to the Member States'
steps in the statistical field, Eurostat has established a task
force on the implications of the Directive on the collection and
dissemination of fiscal data;
- says the output from this task force is expected
to be a set of templates and related notes indicating the methodology,
the scope of compulsory details and the periodicity and timeliness
for national publication of individual indicators to guide the
efforts of national statistical institutes; and
- explains that for the implementation of Article
4(7) of the Directive, Eurostat released for the first time, in
February 2012, a dedicated, regular press release on quarterly
government debt, providing data for the EU, the eurozone and individual
Member States and that a similar initiative is envisaged for the
quarterly deficit.
Macroeconomic and budgetary forecasts (Chapter
III of the Directive)
18.8 The Commission:
- states that macroeconomic and
budgetary forecasts used for fiscal planning have long been considered
a weak spot in the production of annual budgets and some Member
States have been seen for a long time to be suffering from a bias
in their fiscal estimates;
- says that Member States should exercise due diligence
when preparing, publishing and evaluating their forecasts;
- clarifies that forecasting may also include the
involvement of independent institutions or bodies with functional
autonomy, as proposed in the "two-pack" draft Regulation
for monitoring the budgetary plans of the eurozone Member States;[74]
- says that a third of Member States report having
structured processes in place, involving several institutions
or bodies, to ensure transparency and accountability of forecasts;
- adds that other Member States, however, are still
only at the drawing board stage or have so far reported only vague
declarations of intent; and
- explains how certain Member States report drafting
of alternative macroeconomic and budgetary scenarios — a
sound preventive step that facilitates budget shifts at the budget
execution stage when actual parameters depart from the central
scenario.
National numerical fiscal rules (Chapter IV of
the Directive)[75]
18.9 The Commission:
- explains that the Directive
requires Member States to have in place country-specific numerical
fiscal rules that effectively promote compliance with Treaty obligations
in the field of budgetary policy (Articles 5 to 7);
- says that well-designed rules-based frameworks
are known to significantly enhance budgetary discipline, but several
pre-requisites need to be met when Member States design such rules;
- explains that, having been spurred by the introduction
of the Directive and the Treaty on Stability, Coordination and
Governance, major reforms leading to an overhaul of fiscal rules
have been unveiled or are reportedly already completed in 20 Member
States;
- says that including proposed legislation, new
budget balance rules have been unveiled in 11 Member States and
budget-balance rules are being updated with a view to strengthening
them in five others;
- reports that expenditure rules are being established
in ten Member States and reformed in five other Member States
and that the creation or strengthening of national debt rules
is a new development in 12 Member States;
- states that many Member States declare that the
new or updated rules will have features in line with the Directive's
requirements — in particular, several Member States report
that monitoring institutions will be tasked with assessing the
implementation of fiscal rules;
- explains that the scope of fiscal rules is being
expanded to include other sub-sectors of general government outside
central government — in certain Member States, local or
regional government is being subjected to fiscal rules, whether
budget-balance rules, debt rules, or expenditure rules; and
- says that overall, the establishment of national
numerical fiscal rules appears to be on the right track.
Medium-Term Budgetary Frameworks (Chapter V of
the Directive)
18.10 The Commission:
- explains that under the Directive,
Member States are required to establish a credible, effective
Medium-Term Budgetary Framework (MTBF) which must contain multiannual
budgetary objectives in combination with projections of each major
revenue and expenditure item based on unchanged policies and an
assessment as to how the policies envisaged are likely to affect
the long-term sustainability of public finances;
- states that it is important not to see drafting
of a national MTBF in isolation, noting that the timing of the
preparation of the MTBF and its integration within the annual
budget cycle has to be carefully considered so that it can fully
serve as a strategic document for the state, functioning in tandem
with regular annual budget documents;
- explains that wherever necessary the MTBF should
replace existing planning documents or consolidate them into a
single, well-identified, strategic document — consistency
is critical and should be understood along several dimensions;
- says that, first, the MTBF should genuinely serve
as a basis for the subsequent preparation of the annual budget,
secondly, as some Member States have developed multiannual binding
fiscal rules, figures derived from these fiscal rules should naturally
feed into the MTBF and, thirdly, the MTBF document should also
be consistent over time by documenting in detail and transparently
numerical adjustments, whether they derive from base effects,
deviations in outturns or discretionary changes;
- explains that multiannual frameworks are reported
to be in place, or concrete plans exist to establish them, in
22 Member States and that almost all are of a rolling nature and
consequently updated at least every year with the inclusion of
an outer year;
- notes that Slovenia operates a two-yearly budget,
through adjustments conducted every year in combination with an
expenditure framework for three years and that in certain Member
States, reported multiannual frameworks span three to five years;
- explains that legislative provisions ensuring
consistency between national multi-annual frameworks and the corresponding
annual budget processes can be found in some Member States; and
- notes that only a few Member States report that
multiannual projections are presented under a no-policy change
basis.
Mechanisms of coordination across government sub-sectors
(Articles 12 and 13 of the Directive)
18.11 The Commission:
- explains how Article 12 of
the Directive stipulates that the measures provided for by the
Directive must be consistent across, and comprehensive in, the
coverage of all sub-sectors of general government;
- says that with the Directive the scene is set
for a broad-based extension of the principles for accounting,
statistics, forecasting and fiscal rules to social security funds
and local government, which, taken together, account for a sizeable
share of total expenditure;
- says that Article 13 of the Directive stresses
the importance of a clear delineation of budgetary responsibilities
among government tiers;
- says that, accordingly, national provisions should
make sure that the constraints deriving from fiscal targets for
general government are properly internalised by all government
levels;
- explains that such detailed provisions can only
be of a country-specific nature, given the specificities of the
sometimes complex horizontal and vertical redistribution schemes
among and within levels of administration;
- clarifies that such instruments should ideally
be accompanied by fora where representatives of government entities
have the opportunity to exchange views and participate in the
overall annual budgetary cycle at a strategic level, before each
government level prepares its annual budget according to its own
procedural rules;
- explains that beyond the establishment of fiscal
rules for (or their extension to) sub-national governments, Member
States report a variety of coordination instruments at various
stages of the annual budgetary process; and
- gives examples of measures taken in Bulgaria,
Denmark, Germany, Spain, Austria, the Netherlands and Romania.
Conclusion
18.12 The Commission concludes by:
- saying that Member States have
reported substantial but uneven progress in transposing the Directive;
- commenting, with regard to Chapter II of the
Directive, that Member States have still some way to go to ensure
timely and comprehensive statistical coverage for all general
government sub-sectors and that reported forecasting provisions
lack detail in quite a few Member States;
- saying, in relation to numerical fiscal rules
as specified in Chapter IV, that progress is somewhat more advanced
— a wide array of national instruments are being prepared
to buttress national fiscal policy-making;
- claiming that while many Member States report
that MTBFs, in the sense of Chapter V of the Directive, are in
place or planned, the details given are sometimes scarce and do
not provide enough evidence that they will fully comply with the
Directive's specifications;
- concluding that work on effective coordination
arrangements for sub-national governments is being carried out
in many Member States, but the positive intentions reported need
to be turned into concrete and enforceable arrangements; and
- saying that it will continue implementing the
Directive for the sections for which it is responsible and after
the transposition deadline will conduct a full compliance assessment
in accordance with standard EU procedures.
Implementation by the UK
18.13 The Commission's Report is accompanied
by a Staff Working Document recording implementation of the main
provisions of the Directive in each Member State. The information
given for the UK, based on that supplied by the Government, is
as follows:
Accounting and statistics
18.14 The Commission:
- explains that the monthly statistical
release on Public Sector Finances issued by the Office for National
Statistics contains data for all the sub-sectors of the public
sector on an ESA 95[76]
basis and on a cash basis and that the UK authorities report that
all bodies in the general government sector are subject to independent
audit either by the National Audit Office (the UK's supreme audit
authority) or by private sector auditors;
- says that the statistics included in Public Sector
Finances are consistent with the audited data;
- explains how, regarding Article 14 of the Directive,
the Government produces the Whole of Government Accounts, which
provide a consolidated set of financial statements for the UK
public sector; and
- says the Whole of Government Accounts consolidate
the audited accounts of over 1,500 organisations across the public
sector, including central government departments, local authorities,
devolved administrations, the health service, academies and public
corporations, in order to produce a comprehensive, accounts-based
picture of the fiscal position in any one year.
Forecasts
18.15 In this section the Commission:
- starts by discussing the Office
of Budgetary Responsibility (OBR) and sets out its core responsibilities;
- explains that, in its March 2012 publication,
the OBR compared its economic and fiscal forecasts with those
of international forecasters (including the Commission, the IMF
and the OECD) and domestic forecasters and think-tanks (including
the Bank of England, the Institute for Fiscal Studies and the
National Institute of Economic and Social Research);
- explains that in its six-monthly economic and
fiscal outlook publications, the OBR carries out sensitivity analysis
to assess performance against the Government's fiscal targets
— in particular, it looks at the lessons from past forecast
errors, sees how its central forecast changes if some of the key
judgments that underpinned it were changed and looks at alternative
economic scenarios; and
- outlines that the OBR's remit explicitly requires
'an assessment of the accuracy of previous fiscal and economic
forecasts at least once each financial year', noting that to meet
this requirement, the OBR produces an annual Forecast Evaluation
Report, which examines and assesses its recent forecasting performance.
Fiscal Rules
18.16 The Commission simply says that, as set
out in Article 8 of Chapter IV on Numerical Fiscal Rules, "Articles
5 to 7 shall not apply to the United Kingdom".
Medium-Term Budgetary Framework
18.17 The Commission:
- explains the Government's strategy
is to follow a forward-looking fiscal mandate to achieve a cyclically
adjusted current balance by the end of a rolling, five-year forecast
period and achieve a target for public sector net debt to be falling
as a percentage of GDP by 2015-16, in order to bring back public
finances onto a sustainable path;
- says that within this medium-term framework,
the Government sets out four-year spending plans through spending
reviews;
- notes that Spending Review 2010 covers the four
years from 2011-12 to 2014-15, setting out expenditure ceilings
for each government department and that maintaining adherence
to the five-year rolling fiscal mandate and the expenditure limits
set out in Spending Review 2010 is a central part of the annual
budgetary process; and
- says that the OBR's remit requires it to provide
"an analysis of the sustainability of the public finances
at least once each financial year" and that its annual fiscal
sustainability report sets out long-term projections for different
categories of spending and revenue, analyses the public sector's
balance sheet and reports different indicators of long-term sustainability.
Mechanisms of coordination across sub-sectors
of general government
18.18 The Commission says that the OBR's fiscal
forecasts cover the whole public sector, including central government,
local government and public corporations and that the Government's
fiscal mandate and the medium-term budgetary framework target
fiscal aggregates covering the whole of the public sector.
The Government's view
18.19 The Financial Secretary to the Treasury
(Greg Clark) says that:
- the Government considers the
Budgetary Frameworks Directive an important aspect of wider economic
governance within the EU, commenting that it will help to ensure
better budgetary forecasting and responsible budgetary policy
by Member States;
- given Article 8 of the Directive the UK does
not have to implement any aspects of Chapter IV, on Numerical
Fiscal Rules;
- for the other Chapters of the Directive, the
Government considers that it has already achieved the level of
implementation required by the end of the transposition period
and the Commission sets out clearly how the UK is complying; and
- the Government notes the progress that other
Member States have made in implementing the Frameworks Directive
and calls on them to implement the Directive in a timely manner.
Conclusion
18.20 Whilst clearing this document we draw
it to the attention of the House as illustrative of the development
of economic governance within the EU.
71 At present 17 Member States (Austria, Belgium, Cyprus,
Germany, Greece, Estonia, Finland, France, Ireland, Italy, Luxembourg,
Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain)
have adopted the euro. Back
72
(31373) 7110/10: see HC 5-xiv (2009-10), chapter 1 (17 March
2010) and Gen Co Debs, European Committee B, 22 March 2010,
cols. 3-28. Back
73
(32036) 14498/10, (32043)14497/10, (32044) 14496/10, (32045) 14512/10,
(32046) 14515/10, (32047) 14520/10: see HC 428-v (2010-11), chapters
1 and 2 (27 October 2010) and HC Deb, 10 November 2010,
cols. 359-388. Back
74
(33459) 17231/11: see HC 428-xlvi (2010-12), chapter 11 (11 January
2012) and HC 428-li (2010-12), chapter 15 (22 February 2012). Back
75
This chapter does not apply to the UK. Back
76
ESA 95 is the most recently (1995) updated version of the European
System of Accounts, the system of national accounts and regional
accounts used by Member States. Back
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