Deficits and Control of Deficits in Spanish Local Governments Francesc Pujol Universidad de Navarra...
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Deficits and Control of Deficits in Spanish Local Government Francesc Pujol Universidad de Navarra st-graduate studies in political economy, Champéry, September 30 200
Deficits and Control of Deficits in Spanish Local Governments Francesc Pujol Universidad de Navarra Post-graduate studies in political economy, Champéry,
Deficits and Control of Deficits in Spanish Local Governments
Francesc Pujol Universidad de Navarra Post-graduate studies in
political economy, Champry, September 30 2004
Slide 2
1. The Context The Decentralisation Process in Spain The Ley
General de Estabilidad Presupuestaria
Slide 3
The Decentralisation Process in Spain Source: Molero
(2002)
Slide 4
The Decentralisation Process in Spain Source: Molero
(2002)
Slide 5
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
Slide 6
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 Budget Rule.
Respected since then.
Slide 7
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 impact on entrepreneurs decisions and
growth
Slide 8
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 operation of 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)
Slide 9
How to make the case for a Balanced Budget Rule? Which economic
justification? But strictly productive investments that will yield
income to government over some effective life may ve financed by
debt, as they not impose a net burden (p. 133) And also a stricltly
managed budgetary stabilizers policy is considered compatible with
the filosophy of the balanced budget rule (p. 128)
Slide 10
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 of current expenditures consumed today... then public
investments could be financed by debt for the very same reasons:
efficiency: to avoid underprovision of public investments equity:
to avoid overburdening present taxpayers
Slide 11
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
budgets and local government too (both current and capital
expenditures). Buchanan referred only to federal accounts!
Slide 12
How was LGEP adopted? With the opposition of the opposition
parties, of course... but without strong attacks to fiscal
discipline principles
Slide 13
How was LGEP adopted? And the perverse effects on investments
was considered relevant for attacking the law only for small
parties
Slide 14
2. Local Government Finances in Spain Legal framework of
activity Regions do have political autonomy and can issue laws for
their self government. LG have only a role of administrative
management Neither the Constitution of 1978, nor the Statutes of
Autonomy were 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.
Slide 15
2. Local Government Finances in Spain Legal 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 having the legal competencies and the
specific sources of financement. Limited amount of own fiscal
resources
Slide 16
2. Local Government Finances in Spain All these facts produce a
local public sector with, in terms of international comparison: is
small Local Government expenditures in terms of GDP Source: Mau
Pedersen (2004), OECD (2004)
Slide 17
2. Local Government Finances in Spain presents a limited fiscal
autonomy Tax share of total LG revenues Source: Mau Pedersen
(2004), OECD (2004)
Slide 18
3. Fiscal Rules for Spanish LG Before LGEP Ley Reguladora de
las Haciendas Locales (1988) Modified each year since 1996 by a
complementary law attached to the... Central Administration budget!
Debt restricted to finance public investments I 10% precedent
current revenues Approval of Plenary LG Commission + Central
Administration Intervention.
Slide 19
3. Fiscal Rules for Spanish LG Before 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. An adjustment plan is
needed. Criteria for receiving authorisation: economic situation of
the collectivity; the proposed amortization scheme; the economic
benefits of the proposed investment.
Slide 20
3. Fiscal Rules for Spanish LG Before LGEP Restrictions to cash
or short term new indebtness Existence of positive tresorery cash.
If not, long term debt restrictions apply. Maturity shorter than 12
months. With a maximum of 30% of current revenues.
Slide 21
3. Fiscal Rules for Spanish LG With LGEP Objective of
stability: accounts balanced or with surplus in terms of capacity
of financement. New net debts are not allowed. New debt emissions
will be as much equal to 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 need to propose an adjustment
program. And any kind of debt operation requires authorisation from
the Central Administration.
Slide 22
4. Financial Situation of Spanish LG Source: Valls et al.
(2003)
Slide 23
4. Financial Situation of Spanish LG Source: Valls et al.
(2003)
Slide 24
4. Financial Situation of Spanish LG Source: Valls et al.
(2003)
Slide 25
4. Financial Situation of Spanish LG Source: Valls et al.
(2003)
Slide 26
4. Financial Situation of Spanish LG Source: Valls et al.
(2003)
Slide 27
4. Financial Situation of Spanish LG Source: Valls et al.
(2003)
Slide 28
4. Financial Situation of Spanish LG Interpretation of the
results Things were not that wrong at the local level, even before
the introduction of the LGEP
Slide 29
5. Chosing between LGEP and deficits Constraints for local and
regional level are justified under the 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)
Slide 30
5. Chosing between LGEP and deficits But 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 impact in the overall
public sector of even excessive deficits of LG. Very narrow margin
of (re)action of LG to fiscal adjustments as the majority of
resources are tranferts and LG have small legal competencies
concerning own revenues. Adjustment the mainly by reducing
expenditures: but LG are already assuming public services without
financial coverage because of the inactivity of regions.
Slide 31
5. Chosing between LGEP and deficits In 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 investments in order to satisfy
a Balanced Budget rule.
