Subnational and Supranational IFIs from

AIReF’s perspective

José Luis Escrivá, AIReF’s President

8th Annual Meeting of OECD PBOs and IFIs

Session 6- National, Subnational and Supranational IFIs

Paris, 12 April 2016

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1. Does the EFB pose a threat to national IFIs?

2. Is there a case for subnational IFIs in all decentralized countries?

AGENDA

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Double response to the euro crisis

Rules-based coordination system

Sovereignty sharing and common institutions

Post- crisis reforms (6pack, FC, 2pack)

SGP reinforced: more rules, more sophisticated and more stringent

Focused on sustainability of national public finances

IFIs: decentralization of fiscal surveillance

5 Presidents’ Report (June 2015)

Admits rules have become too complex. Forthcoming reform?

More attention to stabilization function and euro area dimension

EFB: risk of recentralization?

2011 Directive: monitoring natl rules

2012-FC:

Common pples + FC monitoring

2013- 2 Pack:

Macro forecasts

EU/ntl rules monitoring

German rules- based

model

Anglo-Saxon model

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External and domestic threats

National pressures: need for a strong position to be effective

EFB set up raises many issues:

On its mandate:

o Advisor and watchdog: potential conflict?

o Fiscal stance?

On its institutional setting:

o Independent, transparent enough?

o Sufficient resources?

EFB and national IFIs: conflicting institutions?

Subsidiarity to be respected

Efficient division of tasks

EFB advice not to jeopardize national IFIs’ role and rules enforcement

National IFIs - well grounded

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Proximity

• Information access advantages

• In-depth knowledge of institutional and social setting

Focus

• Single and concrete mandate

• Fully focused on sustainability

Communication

• Targeted to country specificities

• Single channel to disseminate the benefits of sustainability

Complexity

• Non observable variables

• Complex rules

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Conclusions

The euro area is bound to rely on a hybrid model where the most promising element should be national commitments to strengthen domestic frameworks, as a pre-condition to sustain sound and responsible fiscal policies

Better use of the energy of the center if directed towards promoting robust fiscal frameworks at the local level, rather than fostering one-size-fits-all solutions and recentralization trends (EFB)

IFIs can play a relevant role in this context. Protection from the center to facilitate its consolidation will be decisive

Need for safeguarding national IFIs

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1. Does the EFB pose a threat to national IFIs?

2. Is there a case for sub-national IFIs in all decentralized countries?

AGENDA

Spain- high degree of decentralization

and very complex structure

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CENTRAL ADMINISTRATION 34,8% AUTONOMO

US REGIONS 48,5%

LOCAL ENTITIES

16,7%

Spain Public Expenditure by levels of government

2 levels of SNGs: • 17 regions • 13,000 local entities

(municipalities 8,119 + provinces + others).

Source: OECD. Subnational data set. * OECD average: of 9 federations or quasi- fed countries

Subnational Expenditure 2013 As % of General Government Expenditure

77

48 49

26

0

10

20

30

40

50

60

70

80

AUS AUT BEL CAN GER MEX ESP CH USA OECDavg*

GBR

3 models of fiscal surveillance

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CANADA

State of the nation's finances (2006-PBO)

State of the Province's finances (2013-Ontario)

UK

Forecasts of devolved taxes (2010-OBR)

Assessment of regional gov. tax forecasts (SFC-2014)

SPAIN

GG + every single public administration

(2014-AIReF)

------

National IFI

Subnational

IFIs

Clear separation of tasks

Very strong subnational IFI (consistent with Ontario’s size)

Broadest remit

Huge challenge

Viable? Would a fully decentralized model work better?

Two competing forecast. (OBR- Scottish gov) Divergences?

Limited SFC remit

AIReF legally mandated to oversight SNGs

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Fiscal Policy Planning

Regional budgetary

Targets

Regional macroeconomic

Forecasts

Budgetary monitoring

Ex ante

Draft budgets

In year

Approved budgets

Identification of risks

Enforcement

Asking central government to activate

all the preventive, corrective and coercive

mechanisms

Rebalancing Plans

AIReF monitors the whole budgetary cycle of SNGs: grey (regions and municipalities); pink (only regions).

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Is the Spanish centralized fiscal surveillance model viable?

AIReF proves a national IFI can perform fiscal watchdog functions at subnational level.

Of course, this very much depends on each country characteristics of its institutional stetting and status of the decentralization process.

AIReF established many years after the decentralization process begun. Implications:

• Regional governments: enjoy capacity to estimate own resources

• MoF: estimates info on resources from the regional financing system.

AIReF involved in the 2 (regional and municipal) coordinating bodies between CG and SNGs:

• Attending meetings (no voting right)

• Conducting studies requested by:

‐ the coordinating bodies

‐ individual regions and municipalities provided their scope does not go beyond their powers. In such a case, the request must be made by the coordinating bodies

Analytical capacity

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Factors facilitating AIReF’s performance on SNG’s fiscal surveillance:

• Appropriate legal backing (National Act).

• Ability to build a constructive and candid dialogue between AIReF and SNGs. SNGs very collaborative attitude (key for information provision and smooth relationships)

• High skilled human resources. Ability to attract senior staff with high expertise in SNGs budgetary surveillance. This allows to rapidly develop strong analytical capacity: AIReF could be a benchmark. Some examples:

o Regional level: 17 regions

o Quarterly estimates of GDP

o Risks to budgetary targets

o Debt sustainability analysis

o Municipal level: broadening the scope:

o From 6 to 16 municipalities (> 250,000 inhabitants) in 1 year

Is the Spanish centralized fiscal surveillance model viable?

(II)

Example 1- Risk to 2016 budgetary targets by region

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Lower Upper

Andalucía Likely compliance -0.6% -0.2%

Aragón Very high risk of non-compliance -1.2% -0.8%

Principado de Asturias Likely compliance -0.5% -0.2%

Illes Balears Medium risk of non-compliance -0.7% -0.4%

Canarias Likely compliance -0.1% 0.2%

Cantabria High risk of non-compliance -0.8% -0.5%

Castilla y León High risk of non-compliance -0.9% -0.6%

Castilla-La Mancha High risk of non-compliance -1.1% -0.7%

Cataluña Very high risk of non-compliance -1.5% -1.0%

Extremadura Very high risk of non-compliance -1.5% -1.0%

Galicia Likely compliance -0.4% 0.0%

Comunidad de Madrid High risk of non-compliance -0.9% -0.7%

Región de Murcia Very high risk of non-compliance -1.5% -1.2%

Comunidad Foral de N avarra Medium risk of non-compliance -0.7% -0.4%

País Vasco Likely compliance -0.5% -0.2%

La Rioja Likely compliance -0.6% -0.2%

Comunitat Valenciana Very high risk of non-compliance -1.7% -1.3%

Total CC.AA. Unlikely -1.0% -0.6%

Regions

AIReF estimates for 2016 target (0.3% GDP)

Assessment

Regional govt

balance

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GG

CG+ SSF

LG

AC

CAN

MAD

PVA

RIO

AST

GAL

CYL

NAV

AND

CNT

ARA

EXT

BAL MUR

CLM

CAT

CVA

2010 2015 2020 2025 2030 2035 2040 2045 2050

Year in which compliance with the debt objective would be attained

General government (GG): 60% of GDP • Central Administration (CG) + Social Security Funds (SSF): 44% • Autonomous Communities (AC = Regions): 13% • Local Entities (LE = municipalities): 3%

Example 2- Debt sustainability analysis of regions

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Example 3 – Local outstanding debt over current revenues

Estimates for 2016

Debt > 110%

current

No long-term

indebtedness

Debt <

75%current

revenues

Long-term

indebtedness

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

75% < Debt < 110% current revenues

Authorization for LT indebtedness required

AIReF estimate Local Govt estimate

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Conclusions

Institutional and political factors matter.

Size and heterogeneity of regions make subnational IFIs not viable for each single subnational level. Economies of scales not to be neglected.

History and state of competences devolved are key to understand each model.

Whatever the model, analytical capacity is a precondition for success.

AIReF is perceived as a useful institution by SNGs

The case for subnational IFIs is country- specific

Under the current setting, subnational IFIs in Spain

would be redundant

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