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Deficits and Control of Deficits in Spanish Local Governments. Francesc Pujol Universidad de Navarra. Post-graduate studies in political economy, Champéry, September 30 2004. 1. The Context. The Decentralisation Process in Spain The Ley General de Estabilidad Presupuestaria. - PowerPoint PPT Presentation
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Deficits and Control of Deficits in Spanish Local GovernmentsFrancesc PujolUniversidad de NavarraPost-graduate studies in political economy, Champry, September 30 2004
1. The ContextThe Decentralisation Process in SpainThe Ley General de Estabilidad Presupuestaria
The Decentralisation Process in SpainSource: Molero (2002)
Grfico2
72.6
70.7
68.7
66.6
61.5
60.7
59.6
58.3
57
58.1
58.6
58
55.6
53.2
Central Administration as % of total public expenditures
Hoja1
198472.614.413
198570.715.813.5
198668.717.214.1
198766.618.714.6
198861.522.715.8
198960.723.116.2
199059.623.916.5
199158.325.416.2
19925726.616.4
199358.126.415.5
199458.626.714.5
19955827.314.6
199655.629.115.3
199753.230.915.9
Hoja1
Central Administration as % of total public expenditures
Hoja2
Autonomias
Local Corporations
Autonomias and Local Government as % of total public expenditures
Hoja3
The Decentralisation Process in SpainSource: Molero (2002)
Grfico3
14.413
15.813.5
17.214.1
18.714.6
22.715.8
23.116.2
23.916.5
25.416.2
26.616.4
26.415.5
26.714.5
27.314.6
29.115.3
30.915.9
Autonomias
Local Corporations
Autonomias and Local Government as % of total public expenditures
Hoja1
198472.614.413
198570.715.813.5
198668.717.214.1
198766.618.714.6
198861.522.715.8
198960.723.116.2
199059.623.916.5
199158.325.416.2
19925726.616.4
199358.126.415.5
199458.626.714.5
19955827.314.6
199655.629.115.3
199753.230.915.9
Hoja1
Central Administration as % of total public expenditures
Hoja2
Autonomias
Local Corporations
Autonomias and Local Government as % of total public expenditures
Hoja3
The Decentralisation Process in Spain Spain as a decentralised country
Regions as clear winners of the decentralisation process
Regions actually run the competencies established in the Constitution
An increase of fiscal autonomy for regions since late 90s
Issues on interregional solidarity now emerge (extent of perequation)
Local Governments waiting for a second round of decentralisation
The Spanish Ley General de Estabilidad Presupuestaria, LGEP(Budgetary Stability Law) Spain respects the budgetary Maastricht criteria since 1997
Why not being more stringent than the European rules?
Partido Popular (PP) government passes LGEP in year 2001
The limit of 3% is abandoned and replaced by the Balanced BudgetRule. Respected since then.
How to make the case for a Balanced Budget Rule?Benefits
Control of deficits
Progressive decrease of the financial burden of debt
Indirect control of the size of the public sector
Increase of bargaining power in Brussels
An image of sound public policies management. Positive impacton entrepreneurs decisions and growth
How to make the case for a Balanced Budget Rule?Which economic justification?
BUCHANAN, James (1997), "The Balanced Budget Amendment: Clarifying the Arguments", Public Choice, Vol. 90, pp. 117-138.
Why should future period taxpayers be coerced in order to meet fiscal charges that are incurred by present-period program beneficiaries? (p. 135)
And what about public investments? "If rates of spending on capital projects are roughly uniform over time, the operationof separate current and capital budget accounts would not be different, in effect, from combination into an unified account, all of which is subject to the balanced requirement" (p. 133)
How to make the case for a Balanced Budget Rule?Which economic justification?
But strictly productive investments that will yield income to governmentover some effective life may ve financed by debt, as they not imposea net burden (p. 133)
And also a stricltly managed budgetary stabilizers policy is consideredcompatible with the filosophy of the balanced budget rule (p. 128)
How to make the case for a Balanced Budget Rule?The internal inconsistency of the Global Balanced Budget Rule
If the main reasons for controling deficits are:
efficiency: do not to allow current expenditures to grow beyond optimality if financed by easy money (debt)
equity: do not charge future taxpayers with the payment ofcurrent expenditures consumed today
... then public investments could be financed by debt for the verysame reasons: efficiency: to avoid underprovision of public investments equity: to avoid overburdening present taxpayers
How to make the case for a Balanced Budget Rule?But in Spain we have adopted a law wich imposes:
a global balanced budget, affecting current and capital expenditures
to be respected each year
and it applies for each layer: regions must produce balanced budgetsand local government too (both current and capital expenditures).Buchanan referred only to federal accounts!
How was LGEP adopted?With the opposition of the opposition parties, of course... but without strong attacks to fiscal discipline principles
Grfico1
10
9.7794117647
3.2019704433
7.5342465753
-0.2362204724
-0.243902439
-7.4683544304
5.7575757576
-1.25
4.2857142857
-2.5806451613
-1.4285714286
0.7317073171
4.4
2.8205128205
4.8286140089
9.4127806563
0.931372549
Index of Fiscal Discipline (annual balanced budget) of Parties
Hoja1
GOB10.00
PP9.78
PSOE3.20
CIU7.53
IU-0.24
PNV-0.24
BNG-7.47
CC5.76
ERC-1.25
EA4.29
PAN-2.58
CHA-1.43
IC-V0.73
ECP4.40
SNV2.82
TOT4.83
OK9.41
KO0.93
Hoja1
Index of Fiscal Discipline (annual balanced budget) of Parties
Hoja2
Hoja3
How was LGEP adopted?And the perverse effects on investments was considered relevant for attacking the law only for small parties
Grfico1
1000
9.77941176470.22058823530
3.20197044331.08374384240.4926108374
7.53424657531.36986301370.8219178082
-0.23622047240.39370078740.157480315
-0.2439024392.68292682931.9512195122
-0.7594936709-3.7974683544-2.91
5.75757575762.12121212120
-1.257.50
4.285714285700
-2.58064516132.25806451610.3225806452
-1.42857142864.28571428572.8571428571
0.73170731714.39024390240.487804878
4.44.80
2.82051282051.02564102562.0512820513
4.82861400891.53502235470.2533532042
9.41278065630.34542314340
0.9313725492.52450980390.6862745098
Indice equilibrio global
Indice Regla de Oro
Indice R. Oro + Maastrict
Index of Fiscal Discipline (Golden Rule or Maastricht)
Sheet1
Maastrict
GOB1010100000
PP109.7794117647100.220588235300.22058823530
PSOE4.28571428573.20197044334.77832512321.08374384240.49261083741.08374384240.4926108374
CIU8.9041095897.53424657539.72602739731.36986301370.82191780821.36986301370.8219178082
IU0.3937007874-0.23622047240.55118110240.39370078740.1574803150.62992125980.157480315
PNV2.6829268293-0.2439024394.63414634152.68292682931.95121951222.92682926831.9512195122
BNG-3.6708860759-0.7594936709-2.9113924051-3.7974683544-2.91-3.79746835440.7594936709
CC7.87878787885.75757575767.87878787882.121212121202.12121212120
ERC7.5-1.257.57.508.750
EA4.28571428574.28571428574.28571428570000
PAN2.2580645161-2.58064516132.58064516132.25806451610.32258064524.83870967740.3225806452
CHA4.2857142857-1.42857142867.14285714294.28571428572.85714285715.71428571432.8571428571
IC-V5.12195121950.73170731715.60975609764.39024390240.4878048784.39024390240.487804878
ECP9.24.49.24.804.80
SNV3.84615384622.82051282055.89743589741.02564102562.05128205131.02564102562.0512820513
TOT6.36363636364.82861400896.61698956781.53502235470.25335320421.53502235470.2533532042
Favor9.75820379979.41278065639.75820379970.345423143400.34542314340
Contra3.45588235290.9313725494.14215686272.52450980390.68627450982.52450980390.6862745098
GOB101010
PP109.779411764710
PSOE4.28571428573.20197044334.2857142857-0.7594936709
CIU8.9041095897.53424657538.904109589-2.91
IU0.3937007874-0.23622047240.3937007874
PNV2.6829268293-0.2439024392.6829268293
BNG-3.6708860759-7.4683544304-4.5569620253
CC7.87878787885.75757575767.8787878788-3.7974683544
ERC7.5-1.257.5-0.7608860759
EA4.28571428574.28571428574.2857142857
PAN2.2580645161-2.58064516132.2580645161
CHA4.2857142857-1.42857142864.2857142857
IC-V5.12195121950.73170731715.1219512195
ECP9.24.49.2
SNV3.84615384622.82051282053.8461538462
TOT6.36363636364.82861400896.3636363636
Favor9.75820379979.41278065639.7582037997
Contra3.45588235290.9313725493.4558823529
Sheet1
Indice equilibrio global
Indice Regla de Oro
Indice R. Oro + Maastrict
Index of Fiscal Discipline (Golden Rule or Maastricht)
Sheet2
Sheet3
2. Local Government Finances in SpainLegal framework of activity
Regions do have political autonomy and can issue laws for theirself government. LG have only a role of administrative management
Neither the Constitution of 1978, nor the Statutes of Autonomywere very specific with respect to the competencies of the LG.
Article 25.1 of the Spanish Constitution says: "The town, in order to manage its own interests and within the area of its competencies, can promote any sort of activities and provide any public services, which contribute to satisfy the necessities and aspirations of the comunity
This may include: security, traffic, fire extintion, environment protection,public health, transportation, culture and sports, some education.
2. Local Government Finances in SpainLegal framework of activity
Relations between Regions and LG
Art. 137 Constitution: relationship based in equality
But dependency and intervencionism from Regions in practice: it happens that regions do not spend on what they have legislated for.At the end municipalities produce these new services without havingthe legal competencies and the specific sources of financement.
Limited amount of own fiscal resources
2. Local Government Finances in SpainAll these facts produce a local public sector with, in terms ofinternational comparison: is smallLocal Government expenditures in terms of GDPSource: Mau Pedersen (2004), OECD (2004)
Pct.
Pct.
2. Local Government Finances in Spain presents a limited fiscal autonomy
Tax share of total LG revenuesSource: Mau Pedersen (2004), OECD (2004)
Pct.
Pct.
3. Fiscal Rules for Spanish LGBefore LGEP
Ley Reguladora de las Haciendas Locales (1988)
Modified each year since 1996 by a complementary law attached tothe ... Central Administration budget!
Debt restricted to finance public investmentsI 10% precedent current revenuesApproval of Plenary LG Commission+ Central Administration Intervention.
3. Fiscal Rules for Spanish LGBefore LGEP
New long term debt emissions need Central Administration authorisation
If net savings are negative (before, if lower than 2% of current revenues).A 3 year adjustment plan has then to be presented.
If local public debt is higher than 110% of current revenues. Anadjustment plan is needed.
Criteria for receiving authorisation: economic situation of the collectivity;the proposed amortization scheme; the economic benefits of the proposedinvestment.
3. Fiscal Rules for Spanish LGBefore LGEP
Restrictions to cash or short term new indebtness
Existence of positive tresorery cash. If not, long term debt restrictionsapply.
Maturity shorter than 12 months.
With a maximum of 30% of current revenues.
3. Fiscal Rules for Spanish LGWith LGEP
Objective of stability: accounts balanced or with surplus in terms ofcapacity of financement.
New net debts are not allowed. New debt emissions will be as much equalto past debt amortization.
The Central Administration fixes the 3 year objective of budgetary stability for the LG alltoghether.
A LG budget or account which does no respect the restrictions will needto propose an adjustment program. And any kind of debt operationrequires authorisation from the Central Administration.
4. Financial Situation of Spanish LGSource: Valls et al. (2003)
Grfico1
1.1
1.2
1.25
1.2
0.75
0.6
0.8
0.5
0.45
0.6
0.4
0.35
0.45
Pasivos Financieros/PIB
Hoja1
PasivosDebtPasivos/Inversiones realescarga/ingresos corrientesAHORRO NETODeuda/ingresos corrientes
19881.11.811233-1454
19891.21.859033-952
19901.252.058231-1055
19911.22.310534-2263
19920.752.66826-861
19930.62.85521-562
19940.82.857225-5.564
19950.52.75420-0.863
19960.452.655819.5-0.561
19970.62.6863200.560
19980.42.654514860
19990.352.63613462
20000.452.553812660.5
Hoja1
Pasivos Financieros/PIB
Hoja2
Debt/GDP
Hoja3
Pasivos financieros/Inversiones reales
Carga Financiera/Ingresos corrientes
Ahorro neto/Ingresos corrientes
Deuda/Ingresos corrientes
4. Financial Situation of Spanish LGSource: Valls et al. (2003)
Grfico2
1.8
1.85
2.05
2.3
2.6
2.8
2.85
2.7
2.65
2.68
2.65
2.6
2.55
Debt/GDP
Hoja1
PasivosDebtPasivos/Inversiones realescarga/ingresos corrientesAHORRO NETODeuda/ingresos corrientes
19881.11.811233-1454
19891.21.859033-952
19901.252.058231-1055
19911.22.310534-2263
19920.752.66826-861
19930.62.85521-562
19940.82.857225-5.564
19950.52.75420-0.863
19960.452.655819.5-0.561
19970.62.6863200.560
19980.42.654514860
19990.352.63613462
20000.452.553812660.5
Hoja1
Pasivos Financieros/PIB
Hoja2
Debt/GDP
Hoja3
Pasivos financieros/Inversiones reales
Carga Financiera/Ingresos corrientes
Ahorro neto/Ingresos corrientes
Deuda/Ingresos corrientes
4. Financial Situation of Spanish LGSource: Valls et al. (2003)
Grfico3
112
90
82
105
68
55
72
54
58
63
45
36
38
Pasivos financieros/Inversiones reales
Hoja1
PasivosDebtPasivos/Inversiones realescarga/ingresos corrientesAHORRO NETODeuda/ingresos corrientes
19881.11.811233-1454
19891.21.859033-952
19901.252.058231-1055
19911.22.310534-2263
19920.752.66826-861
19930.62.85521-562
19940.82.857225-5.564
19950.52.75420-0.863
19960.452.655819.5-0.561
19970.62.6863200.560
19980.42.654514860
19990.352.63613462
20000.452.553812660.5
Hoja1
Pasivos Financieros/PIB
Hoja2
Debt/GDP
Hoja3
Pasivos financieros/Inversiones reales
Carga Financiera/Ingresos corrientes
Ahorro neto/Ingresos corrientes
Deuda/Ingresos corrientes
4. Financial Situation of Spanish LGSource: Valls et al. (2003)
Grfico4
33
33
31
34
26
21
25
20
19.5
20
14
13
12
Carga Financiera/Ingresos corrientes
Hoja1
PasivosDebtPasivos/Inversiones realescarga/ingresos corrientesAHORRO NETODeuda/ingresos corrientes
19881.11.811233-1454
19891.21.859033-952
19901.252.058231-1055
19911.22.310534-2263
19920.752.66826-861
19930.62.85521-562
19940.82.857225-5.564
19950.52.75420-0.863
19960.452.655819.5-0.561
19970.62.6863200.560
19980.42.654514860
19990.352.63613462
20000.452.553812660.5
Hoja1
Pasivos Financieros/PIB
Hoja2
Debt/GDP
Hoja3
Pasivos financieros/Inversiones reales
Carga Financiera/Ingresos corrientes
Ahorro neto/Ingresos corrientes
Deuda/Ingresos corrientes
4. Financial Situation of Spanish LGSource: Valls et al. (2003)
Grfico5
-14
-9
-10
-22
-8
-5
-5.5
-0.8
-0.5
0.5
8
4
6
Ahorro neto/Ingresos corrientes
Hoja1
PasivosDebtPasivos/Inversiones realescarga/ingresos corrientesAHORRO NETODeuda/ingresos corrientes
19881.11.811233-1454
19891.21.859033-952
19901.252.058231-1055
19911.22.310534-2263
19920.752.66826-861
19930.62.85521-562
19940.82.857225-5.564
19950.52.75420-0.863
19960.452.655819.5-0.561
19970.62.6863200.560
19980.42.654514860
19990.352.63613462
20000.452.553812660.5
Hoja1
Pasivos Financieros/PIB
Hoja2
Debt/GDP
Hoja3
Pasivos financieros/Inversiones reales
Carga Financiera/Ingresos corrientes
Ahorro neto/Ingresos corrientes
Deuda/Ingresos corrientes
4. Financial Situation of Spanish LGSource: Valls et al. (2003)
Grfico6
54
52
55
63
61
62
64
63
61
60
60
62
60.5
Deuda/Ingresos corrientes
Hoja1
PasivosDebtPasivos/Inversiones realescarga/ingresos corrientesAHORRO NETODeuda/ingresos corrientes
19881.11.811233-1454
19891.21.859033-952
19901.252.058231-1055
19911.22.310534-2263
19920.752.66826-861
19930.62.85521-562
19940.82.857225-5.564
19950.52.75420-0.863
19960.452.655819.5-0.561
19970.62.6863200.560
19980.42.654514860
19990.352.63613462
20000.452.553812660.5
Hoja1
Pasivos Financieros/PIB
Hoja2
Debt/GDP
Hoja3
Pasivos financieros/Inversiones reales
Carga Financiera/Ingresos corrientes
Ahorro neto/Ingresos corrientes
Deuda/Ingresos corrientes
4. Financial Situation of Spanish LGInterpretation of the results
Things were not that wrong at the local level, even before the introduction of the LGEP
5. Chosing between LGEP and deficitsConstraints for local and regional level are justified underthe EMU framework and Amsterdam criteria.
Compliance with European rules depends on the behavior of all levels of government
... But only the central level is held accountable for respecting these rules
This asymmetry can increase incentives for lack of fiscal discipline at sub-national level (common pool problem)
5. Chosing between LGEP and deficitsBut do we need a strict balanced budget rule for LG?
Specificities of LG in Spain:
LG expenditures represent only 7% of GDP or less than 15%of total public sector: limited danger of determinant impactin the overall public sector of even excessive deficits of LG.
Very narrow margin of (re)action of LG to fiscal adjustmentsas the majority of resources are tranferts and LG have smalllegal competencies concerning own revenues.
Adjustment the mainly by reducing expenditures: but LGare already assuming public services without financialcoverage because of the inactivity of regions.
5. Chosing between LGEP and deficitsIn many cases, the better solution in Spain to cover LG deficits is an increase of transfers (or debt), instead of increasing taxes or reducing expenditures:
Level of income below average (perequation) Suffering from recession in a higher extent than average Need of infrastructure. Demographic conditions (concentration of old or young people) Higher cost for providing mandatory local services
Spain cannot sacrify the needed amount of public investmentsin order to satisfy a Balanced Budget rule.
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