31
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

  • Upload
    tareq

  • View
    38

  • Download
    2

Embed Size (px)

DESCRIPTION

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

Citation preview

  • 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.