Budgetary surveillance : the operational aspects

 Alain Morisset


The Maastricht Treaty (in particular Article 104 C), and its associated legislation (the Protocol on the excessive deficit procedure, Council Regulation (EC) No 3605/93 on the application of the Protocol on the excessive deficit procedure) provide a systematic operational framework for the implementation of budgetary surveillance. The monitoring of budgetary developments in the Member States is the initial phase for evaluating whether or not countries respect the principle of sound public finances required by the Treaty. The procedure set up at the European level organises the monitoring of government deficit and debt figures, which must comply with the economic accounting principles, and more specifically with the rules of the European system of economic accounts (ESA). The procedure also defines an obligation for each Member State to report twice a year to the European Commission its actual and planned deficits as well as the level of its debt. The European Commission then assesses the validity of the figures both in technical and economic terms.

This system has been operational since 1 January 1994, the starting date of stage 2 of economic and monetary union. The choice made to rely on figures produced using comparable economic accounting rules well known to economists, but often different from national accounting practices and presentations of budget laws, has necessitated some adaptation by Member States in the follow-up of their own budgetary developments. Furthermore, the built-in authority of the EU budgetary discipline provisions have led policy makers to formalise more explicitly their budgetary policy choices and goals with reference to the definitions and accounting rules required at the EU level. In the last 3 years, a lot of experience has been gained, as a dynamic movement has been taking place, whereby the monitoring of budgetary situations, and the presentation of budgetary orientations, have been increasingly taking place on a comparable quantitative basis.

Budgetary surveillance will also acquire a broader dimension in stage 3 of economic and monetary union, as Member States participating in the euro area will be submitted to a stability and growth pact which will strengthen budgetary discipline. As the proposed pact relies upon the technical requirements already in force in stage 2 of economic and monetary union, Member States are not expected to be faced with specific difficulties, although they might need to speed up the production of figures in order to meet tighter deadlines.

RELIANCE ON PRECISE DEFINITIONS AND ACCOUNTING RULES

National budgets, as proposed by governments and adopted by parliaments, record and present fiscal operations according to public accounting conventions which are the result of long standing practices and regulations. Aggregated transactions and balances shown in budget law documents are hardly comparable between Member States, as the government sector covered by the budget can be more or less extensive, and recorded transactions more or less exhaustive. Accounting procedures and methods of compilation of data may also differ.

Surveillance at the European level requires comparable data established on similar definitions that use the same accounting rules. Because figures directly drawn from national budgets cannot be used, it was decided to rely on figures produced according to the identical definitions and accounting rules of the ESA system of economic accounts. The chosen common definition of the budget deficit is the net borrowing balance of general government, that is, the balance of current and capital transactions of the whole government administration which comprises central government, local authorities and social security. This definition is generally somewhat more restrictive in terms of coverage of transactions than are budget deficits of national budget laws, as it excludes all financial transactions, for example privatisation proceeds. At the same time, the definition is usually wider in terms of coverage of the government sector, as national budget laws are often limited to the central government or only part of it (the State).

The EU legislation also lays down a common definition of public debt. Different coverage and concepts of public debt were possible. The legislators opted for a simple and quickly operational common definition : gross debt of the general government sector, the intrasectoral claims and liabilities being consolidated. It is worth mentioning that the definition of government debt used covers the gross debt of the entire general government, but does not include the debt of public enterprises. In economic accounting terms, public firms, being producers of market goods and services, are classified with private firms in the enterprise sector, and not in the general government sector which only produces administrative services.

Member States are familiar with the ESA system of economic accounts, which is very close to the economic accounts systems used by national statisticians and to the harmonised system adopted by international institutions. Therefore, systematic reliance on the ESA system has not raised any particular conceptual or analytical difficulty, as there is a long practice of producing data under this system. However, in some Member States, production of economic accounts data was not necessarily granted sufficient priority in the past, so that particular efforts have been necessary in order to produce comprehensive and reliable general government figures in a timely way for the budgetary surveillance requirements.

MONITORING BUDGETARY PERFORMANCES AT REGULAR INTERVALS

Member States are formally required to report their actual and planned government deficit and level of government debt twice a year to the Commission, before 1 March and 1 September respectively.

The principal interest in the quantitative information reported before 1 March lies in the provision of the deficit and debt outcomes for the past year, and of the deficit planned for the current year. On March 1 at the latest, it can be expected that the Member States will deliver figures of good statistical quality for the past year to the Commission. It must, however, be said that this deadline still often requires Member States to speed up their compilation of basic statistics and the production of their aggregates. This is because in most Member States the production of data in the national budget presentation and in economic accounting terms is not synchronised, and the completion of economic accounts figures tends to lag behind the release of the data established in public accounting terms. National budget administrations record their fiscal decisions according to their public accounting system used for the budget, and monitor the budget outcome on the same accounting basis. It is usually the task of the national statistical services to convert the quantitative information into economic accounts figures.

Furthermore, as mentioned above, national budgets cover only State operations or those of the central government. Compilation of information outside the budget law but within the general government sector, like, for example, transactions made by local authorities and by the social security administration, may not have been subjected in the past to the same deadlines as central government operations.

The interest in the figures reported before 1 September resides in the availability of more accurate estimates of the deficit for the current year, as close to two third of the year has now elapsed. This is an opportunity to check whether budgetary developments are being kept on track in comparison to budgetary objectives. Also, at this time of year, figures obtained for the previous year have almost reached a definitive status.

In the last three years, Member States have taken numerous technical measures designed to improve the quality of their figures, their exhaustivity and quick availability. Collaboration within Member States has developed between the various administrations involved. The European Commission ensures extensive multilateral information and concertation with the Member States on technical issues in order to ensure equality of accounting and quantitative treatment among Member States for the production of comparable deficit and debt figures.

 

BUDGETARY SURVEILLANCE IN THE PERSPECTIVE OF STAGE 3 OF ECONOMIC AND MONETARY UNION

Before the existence of the Maastricht Treaty provisions on budgetary discipline, the budget’s presentation in economic accounting terms was mainly viewed as a useful complement to the presentation in public accounting terms, but was not given a high normative content in terms of budgetary policy. Its main role was to show figures in a suitable form for economic analysis within a time frame. Also, such figures have always been predominantly used for macroeconomic forecasting, as economists need the consistency of the economic accounting system to estimate interrelations between various agents and to forecast the main macroeconomic aggregates. Many Member States also produce projections of budgetary aggregates as benchmark scenarios or strategies for the definition of fiscal policy in a medium term perspective. However, such exercises, however useful they may be, have traditionally had very little normative content.

As the Maastricht Treaty has defined budgetary discipline obligations for the general government, national budgetary authorities are now faced with the need to take into consideration early enough in their decision making process the overall government dimension which is monitored at the EU level. This requires closer co-operation between budgetary authorities of the various subsectors of general government, and some organisation of the respective responsibilities in the area of budgetary discipline.

In the perspective of a stability and growth pact applicable to the Member States joining economic and monetary union in Stage 3, whose principles have been agreed upon by the European Council in Dublin in December 1996, the Commission is proposing that the Council adopt two regulations, the first one on the strengthening of the surveillance and co-ordination of budgetary positions, and the second one on speeding up and clarifying the excessive deficit procedure.

The Commission proposes in the first document that the budgetary aspects of multilateral surveillance be reinforced for those countries participating in the euro area, so as to provide an early warning system. The countries would be required to submit stability programmes setting out medium term budgetary objectives close to balance or in surplus. Developments in the budgetary positions of Member States would be monitored at the EU level with reference to these medium-term budget objectives. The Commission proposal builds upon the experience already gained with the existing convergence programmes, but would organise surveillance in a more systematic and normative way. In operational terms, enhanced surveillance will lead to systematic use, in a medium term perspective, of definitions and accounting presentations already required under the excessive deficit procedure in order to ensure the necessary quantitative consistency between the short and medium term dimensions of surveillance.

The second draft regulation proposed by the Commission aims at speeding up the excessive deficit procedure by setting time limits for the completion of key steps. Such an accelerated timetable is aimed at allowing for the possibility to decide upon sanctions within a period of ten months following the initial reporting of the deficit and debt figures if no sufficient corrective action has been taken in the meantime. The expeditious application of the excessive deficit procedure will impose some pressure on compilers of budgetary statistics because of the tighter deadlines set for the appraisal of situations and for deciding on corrective action, which will often necessitate quicker availability of reliable figures and estimates.

 

CONCLUSION

Budgetary surveillance, as set out in the Maastricht Treaty and its associated legislation, has been in operation since 1994. Member States have adapted satisfactorily to the operational requirements concerning the use of common and comparable definitions and accounting rules, and to the timely delivery of the reliable quantitative information necessary for an efficient monitoring of budgetary positions. Budgetary surveillance at the European level is presently mainly organised in the framework of the excessive deficit procedure. With the stability and growth pact, the monitoring of budgetary positions will be speeded up, and surveillance will also be strengthened in a medium term perspective. In monetary union budgetary surveillance will thus not only cover the identification of gross errors concerning budgetary situations, but also the monitoring of budgetary developments in relation with the objective of sustainable public finances. With the experience gained since 1994 in terms of reliance on comparable general government figures, the technical adjustments required for the timely availability of data and for the setting of budgetary policy objectives in comparable terms will be few, and should not raise particular difficulties.

 15-01-1997

 

BACK

HOME

CONTACT