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Twenty-ninth Report of Session 2012-13 - European Scrutiny Committee Contents


18   Economic governance

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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

Legal base
Document originated14 December 2012
Deposited in Parliament21 December 2012
DepartmentHM Treasury
Basis of considerationEM of 15 January 2013
Previous Committee ReportNone
Discussion in CouncilNone planned
Committee's assessmentPolitically important
Committee's decisionCleared

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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Prepared 30 January 2013