meeting with the imf delegation · fonte: chamber of deputies [2013] 9. commissione tecnica...

Commissione tecnica pariteticaper l’attuazione del federalismo fiscalep

COPAFF

Commissione tecnica paritetica per l’attuazione del federalismofiscale (Copaff)fiscale (Copaff)

i i b di d lb diLuca Antonini, Ernesto Longobardi and Alberto Zanardi

Meeting with theMeeting with theIMF Delegation

l dRome, July 3rd 2013

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COPAFF

Contents

1)1) Italian local public finance in the framework of national Italian local public finance in the framework of national public accountspublic accounts

2)2) The «fiscal federalism» reformThe «fiscal federalism» reform

3)3) Fiscal rules in the Italian multiFiscal rules in the Italian multi‐‐level system: the Internal level system: the Internal Stability PactStability Pact

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Public finance indicators (General government, millions euros)

Central gvmnt

Local gvmnt

Social secutity

institutions

General gvmnt (consolidated)

Central gvmnt

Local gvmnt

Social secutity

institutions

General gvmnt

(consolidated)

2011 2012

Current expenditure 425,335 211,108 310,561 747,964 426,415 209,095 317,926 753,255 public debt interests 74,593 4,193 149 78,351 82,909 4,153 162 86,717 transfers to other levels of gvmnt 192,526 856 5,065 191,966 2,360 5,348Capital expenditure 26,191 30,510 348 48,116 29,159 28,180 ‐46 47,827Total final expenditure 451,526 241,618 310,909 796,080 455,574 237,275 317,880 801,082Total final expenditure net of interests 376,933 237,425 310,760 717,729 372,665 233,122 317,718 714,365

Current revenue 382,702 226,690 314,378 724,730 398,172 227,933 321,183 747,107 tax revenues 354,382 100,605 0 454,987 363,671 108,493 0 472,164 transfers from other levels of gvmnt 5,927 93,906 98,623 7,708 86,276 105,690Totale final revenue 391,236 238,423 314,378 736,064 401,914 239,999 321,183 753,449

Net deficit 60 290 3 195 3 469 60 016 53 660 2 724 3 303 47 633Net deficit ‐60,290 ‐3,195 3,469 ‐60,016 ‐53,660 2,724 3,303 ‐47,633Source: Def 2013



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• Central government (CG) mainly re‐allocates resources to other government levels (transfers amount to 45% of current g ( %expenditure)

• CG centralizes the management of the public debt by meansCG centralizes the management of the public debt by means of intergovernmental transfers (96% of interest payments on public debt are paid by CG)



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During the last three years 2010–2012:

• the nominal expenditure of General Government (GG) has decreased

• transfers from CG to Local Government have been reducedtransfers from CG to Local Government have been reduced (‐19%)

• local tax revenue has increased (+11%)• final expenditures of LG has decreased ( 5% in particular 22%• final expenditures of LG has decreased (‐5% in particular ‐22%

for capital expenditures) more than expenditure by CG net of intergovernmental transfers (‐2,2%)



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Cumulative effects of fiscal consolidation measures Cumulative effects of fiscal consolidation measures Cumulative effects of fiscal consolidation measures Cumulative effects of fiscal consolidation measures 20112011--12 by tiers of government (million 12 by tiers of government (million euroseuros))



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i illi illAn issue still open:An issue still open:

how to evaluate the contribution of different government levels how to evaluate the contribution of different government levels to fiscal consolidation?to fiscal consolidation?to fiscal consolidation? to fiscal consolidation?

With reference to:With reference to:

•• net deficit?net deficit?

oror

•• primaryprimary expenditure?expenditure?

In the In the former case, former case, how intergovernmental transfers should be how intergovernmental transfers should be treated?treated?



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IIf we refer to the primary expenditure of each tier of government:f we refer to the primary expenditure of each tier of government:

Cumulative effects of fiscal consolidation measures 2011‐12

1 2 1 2 1 2 1 2Central government 9.1 18.7 11.4 23.1 11.6 23.9 10.5 21.0Local government 5.1 5.1 9.0 9.3 11.6 11.9 11.6 11.7

2012 2013 2014 2015

gSocial security institutions 1.2 1.3 3.0 3.1 3.7 3.7 4.1 4.2 1: ratio to final expenditure net of public debt interests 2: ratio to final expenditure net of public debt interests and transfers to other levels of government



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Contribution of local governments to fiscal consolidation measures 2008‐2012 (net deficit reduction, million euros)

Measure 2009 2010 2011 2012 2013 2014 2015Measure 2009 2010 2011 2012 2013 2014 2015

Ordinary RegionsD.L. 112/2008 Internal Stability pact tightening 900 1,380 2,440 2,440 2,440 2,440 2,440D.L. 78/2010 Transfers cut 4,000 4,500 4,500 4,500 4,500D.L. 98/2011 e D.L. 138/2011 Internal Stability pact tightening 1,600 1,600 1,600 1,600L 183/2011 (Robin tax) Transfers increase 760L. 183/2011 (Robin tax) Transfers increase ‐760L. 183/2011 (premialità enti virtuosi) Internal Stability pact relief ‐95D.L. 95/2012 Transfers cut 700 1,000 1,000 1,050L. 228/2012 Internal Stability pact tightening 1,000 1,000 1,000Transfers cut 0 0 4,000 4,440 5,500 5,500 5,550Internal Stability pact tightening 900 1,380 2,440 3,945 5,040 5,040 5,040y p g g , , , , , ,Total 900 1,380 6,440 8,385 10,540 10,540 10,590

MunicipalitiesD.L. 112/2008 Internal Stability pact tightening 1,340 2,350 4,160 4,160 4,160 4,160 4,160D.L. 78/2010 Transfers cut 1,500 2,500 2,500 2,500 2,500D.L. 98/2011 e D.L. 138/2011 Internal Stability pact tightening 1,700 2,000 2,000 2,000L. 183/2011 (Robin tax) Transfers increase ‐520L. 183/2011 (premialità enti virtuosi) Internal Stability pact relief ‐65D.L. 201/2011 Transfers cut 1,450 1,450 1,450 1,450D.L. 95/2012 Transfers cut 500 2,000 2,000 2,100L. 228/2012 Transfers cut 100 250 500 500T f t 0 0 1 500 4 030 6 200 6 450 6 550Transfers cut 0 0 1,500 4,030 6,200 6,450 6,550Internal Stability pact tightening 1,340 2,350 4,160 5,795 6,160 6,160 6,160Total 1,340 2,350 5,660 9,825 12,360 12,610 12,710

Local governmentsTransfers cut 0 0 5,800 9,550 15,015 15,565 15,840I t l St bilit t ti ht i 3 150 5 200 9 700 16 020 18 100 18 100 18 100

Rome, July 3rd 2013

Internal Stability pact tightening 3,150 5,200 9,700 16,020 18,100 18,100 18,100Total 3,150 5,200 15,500 25,570 33,115 33,665 33,940Fonte : Chamber of Deputies [2013]

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T diff ki d f lid LGTwo different kinds of measures to consolidate LG accounts:

1) cutting transfers from CG (and tax revenue sharing)1) cutting transfers from CG (and tax revenue sharing) 2) tightening the Internal Stability Pact (ISP), with no change in the

total resources assigned to LG



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2012 consolidation measures:• municipalities and provinces: only cuts in grants

i b h i (d l / ) d i h i f• regions: both cuts in grants (d.l. n. 95/2012) and tightening of the ISP targets (l. n. 228/2012)

Considering the period 2008‐ 2012 the consolidation measures have mainly consisted in grants’ cutsy g



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• There are serious difficulties in using ISP as the unique instrument to control public deficit formation at subnational level.

• At present the ISP mechanism as it is implemented implies• At present the ISP mechanism, as it is implemented, implies that many local governments incur in budget surpluses this result is clearly inefficient (a huge amount of this result is clearly inefficient (a huge amount of resources ends up being locked)



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A paradox: in «years of fiscal federalism» we have mainly relied on cuts in transfersrelied on cuts in transfers

At present, especially in the case of municipalities, there are no p p y pmore transfers to be cut (unless considering tax sharing a form of transfer which can be cut)



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Contents

1)1) Italian local public finance in the framework of Italian local public finance in the framework of national public accountsnational public accounts

2)2)Th fi l f d li fTh fi l f d li f2)2)The «fiscal federalism» reformThe «fiscal federalism» reform

3)3) Fiscal rules in the Italian multiFiscal rules in the Italian multi level system: the level system: the 3)3) Fiscal rules in the Italian multiFiscal rules in the Italian multi--level system: the level system: the Internal Stability PactInternal Stability Pact



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• Law 42/2009• 9 delegated decrees9 delegated decrees • 70 administrative measures to be issued



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For the time being the reform has produced very poor results.For the time being the reform has produced very poor results.

The implementation of the reform has been complicated by the interaction with the measures of fiscal consolidation

The gro p of 10 e perts for the str ct ral reforms appointedThe group of 10 experts for the structural reforms appointed by President Giorgio Napolitano has stated that the reform should be enhanced:should be enhanced:• “the reform should not remain forever in limbo … it should

become an essential component of revival policies for the Country”



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There is strong demand for a system of intergovernmental relations more stable and certain



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Th f f i l fiThe reform of regional financeIt should have been entered into force in 2013All the main measures of implementation are missing:All the main measures of implementation are missing:• the design of the equalization system:

• the choice of l.e.p. expenditure needs (only the evaluation of standard needs for health care is in progress)th l ti f th t d d fi l it• the evaluation of the standard fiscal capacity

• the regulation of the role of regional governments in the equalization system of local entities (municipalities andequalization system of local entities (municipalities and provinces)

• the substitution of regional transfers to local entities with tax

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resources (“fiscalization”)18


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The «stability law» for 2013 has deferred the reform of the regional surcharge on PIT (“addizionale Irpef”) to 2014



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The reform of municipal financeThe reform of municipal finance• The issue of ImuOwner‐occupied dwellingCentral government componentR t d ti d i l d ti tiRented properties and commercial‐productive properties

• Tares The component “indivisible services” The component indivisible services

• Negative experience of the experimental fund of equalization 2011 – 2012

• New equalization fund starting with 2013

• The design of the equalization system (it should be modified w rt what is provided in D Lgs 23/2011)w.r.t. what is provided in D.Lgs. 23/2011)Estimation of standard expenditure needs indicators Estimation of standard fiscal capacity



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Other missing elements of the reform

Incentive mechanism for local administrators (decree 149/2011) The decree has not yet been implemented Legislature/mandate final report (d l 174/2012) Legislature/mandate final report (d.l. 174/2012) Coordination with the sanctions system of the ISP

Capital expenditure financingCapital expenditure financing Infrastructure equalization

The coordination of the multi‐level public financeThe coordination of the multi‐level public finance Activation of the Permanent Commission for the Coordination of Public Finance

The provinces issue d.l. 201/2011 direction and coordination d.l. 95/2012 reduction of the number of provinces and re‐

Rome, July 3rd 2013

d.l. 95/2012 reduction of the number of provinces and reorganization (the process has been interrupted at the end of the last legislature)

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Contents

1)1) Italian local public finance in the framework of national public Italian local public finance in the framework of national public accountsaccounts

2)2) The «fiscal federalism» reformThe «fiscal federalism» reform

3)3) Fiscal rules in the Italian multiFiscal rules in the Italian multi‐‐level system: the Internal level system: the Internal Stability PactStability Pact



COPAFF

Fiscal rules in the Italian multi‐level system

in Italy the fiscal discipline of sub‐national governments is based on a number of fiscal rules:on a number of fiscal rules:

• the balanced budget rule provides the possibility of debtthe balanced budget rule provides the possibility of debt financing only for investment, but the LG sector as a whole must balance the budget within the each region (“limited golden rule” provided by the new art. 119 of Italian Constitution, in force in 2016

• there are limits to the debt level provided by ordinary laws (they establish the maximum ratio between interest

Rome, July 3rd 2013

( yexpenditures on public debt and total revenues)

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Fiscal rules in the Italian multi level systemFiscal rules in the Italian multi‐level system

• ISP rules, which aim to ensure the contribution of LGs to the financial target of GGg

• rules which differ from those which are relevant for the EU (net deficit and public debt), such as personnel

dit / t dit ti bli d bt i t texpenditure/current expenditure ratio, public debt interest expenditure/current expenditure etc.

• controls on local resources by means of the regulation ofcontrols on local resources by means of the regulation of central government grants



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The law on balanced budget

The law on balanced budget (l. 243/2012) imposes a non‐negative balance to local governments:

• in nominal terms (not in structural terms, i.e. taking into account the effects of business cycle and una tantummeasures)

• overall (final expenditures and revenues)i ( di d )• on current items (current expenditures and current revenues)

• in the budget (ex ante)• in the final results (disincentive to include revenues difficult to

collect in the budget)collect in the budget)

Instead, for GG the law on balanced budget imposes the balanced budget in terms of (structural) medium‐term objectiveg ( ) j



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The law on balanced budget

In order to make the balanced budget requirement consistent with the needs of public investment, the local governments are subject to a limited golden r le i e the are allo ed to rec r to debt toto a «limited golden rule», i.e. they are allowed to recur to debt to finance public investments under two conditions:

1) in inter temporal terms: they must establish an amortization1) in inter‐temporal terms: they must establish an amortization plan (without debt accumulation in the medium term)

2) in territorial terms: they must assure a balanced budget for the2) in territorial terms: they must assure a balanced budget for the LG sector as a hole within the region (regional government included), on the basis of territorial agreements



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In order to isolate the budget of local governments from business g gcycle, the law provides a double mechanism:

) i d h i f f i d f1) in downturns, the CG activates a system of transfers in order of balancing the decrease in local revenue with reference to the local expenditure functions for which the CG sets minimumlocal expenditure functions for which the CG sets minimum standards:• Application, at the local level, of the flexibility allowed to the national level• Ne trali ation of incenti es to pro c clical meas res for local go ernments hich ma• Neutralization of incentives to pro‐cyclical measures for local governments, which may

attenuate national measures of stabilization• Difficulties in the estimation of standard fiscal capacity (in respect to economic cycle) in

order to avoid opportunistic fiscal behavior pp• Coordination of “insurance” transfers and “equalization” transfers• How to smooth the effects of the business cycle on local expenditures on which the central

government sets minimum standards?



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2) In upturns, LGs must contribute to the debt sustainability by means of an “Amortization fund of government bonds”

The mechanisms 1) and 2) should pledge the stabilization of theThe mechanisms 1) and 2) should pledge the stabilization of the local resources along the business cycles



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O ll th l b l d b d t h t li ti t iOverall the law on balanced budget shows a centralistic stance in which the reasons of financial control prevail on the reasons of fiscal autonomy supported by fiscal federalism reformfiscal autonomy supported by fiscal federalism reform



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In the new framework, which is role for the current rules of the Internal Stability Pact? Law 243/2012: “… in order to ensure the respect of the constraints of the EU, the ordinary law… may provide furtherconstraints of the EU, the ordinary law… may provide further constraints for the local governments… concerning the contribution to the targets of public finance”

ISP: introduced in 1999 but continuously adjusted in its main components:

d fi i i f h fi i l f (b d di )• definition of the financial reference (budget, expenditures)• cash flow/accrual reference• current/capital reference/ p• Rule for determining financial adjustment• Public bodies involved • mechanism of sanctions/incentives

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• mechanism of sanctions/incentives

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Do ISP constraints replicate those imposed by the EU at the nationalDo ISP constraints replicate those imposed by the EU at the national level?No!Therefore we need a reform of the ISP

Which general g idelines co ld this reforms follo ?Which general guidelines could this reforms follow?

• a new definition of financial reference of the ISP consistent witha new definition of financial reference of the ISP consistent with those relevant for UE targets euro‐compatible definition of financial target

• a revision of the sharing of fiscal adjustment between CG and LGs for the achievement of the external target



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Stability law 2012, Art.32:Stability law 2012, Art.32:

“… starting from 2013 the modality of achievement of thepublic finance targets are conformed to the European criteria,concernig the identification of revenues and expenditurescategories to be considered in the comp tation of the b dgetcategories to be considered in the computation of the budgettarget for the ISP…”



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Only two fiscal rules for LGs:

a) a constraint on (euro‐compatible) deficit

b) a constraint on debt (related to population and/or current revenues)

Any other constraint should be removed



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Constraint on (euro‐compatible) deficit

Overall external target assigned to different tiers of government according:• to the actual contribution of each government tier to the• to the actual contribution of each government tier to the

formation of deficit and/orand/or

• to a transparent assignment of deficit permissions to local governments for investment expenditures



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Constraint on (euro‐compatible) deficit

A critical elementHow to consider intergovernmental fiscal relations (transfersHow to consider intergovernmental fiscal relations (transfers and tax sharing) for the determination of local government contribution to overall deficit? contribution to overall deficit?Proposal: CG’s grants could be included in local revenues, but only considering the component directed to finance fundamental functions at standard costs



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Constraint on debt

It establishes targets of reduction of the debt stock, assigned to different subnational governments in relation to population and/or current revenues consistent with the EU targets at the and/or current revenues, consistent with the EU targets at the national level


meeting with the imf delegation · fonte: chamber of deputies [2013] 9. commissione tecnica...

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