OECD Network on Fiscal Relations across Levels of Government, 16th Annual Meeting, 3-4 December 2020 – Virtual Meeting

1. FISCAL RULES FOR
SUBNATIONAL GOVERNMENTS
The Devil in the Details
OECD Network on Fiscal Relations across Levels of Government 4 December, 2020
Camila Vammalle & Indre Bambalaite

2. Structure of the survey and paper
Fiscal
Rules for
SNGs
Budget balance objectives
Borrowing and debt rules
Expenditure limits
Tax limitations
Monitoring and enforcement mechanisms
Relations with banks and SOEs
Dealing with the impact of economic
cycles and unexpected shocks

3. BUDGET BALANCE OBJECTIVES

4. • Country X has a balanced budget rule (zero deficit) for
SNGs
• Country Y has a balanced budget rule (zero deficit) for
SNGs
QUESTION: Which country has the most stringent rule?
A: Country X C: Both are the same
B: Country Y D: I can’t tell
Quizz!

5. • Can be applied to individual SNGs or to all SNGs on aggregate
• Can cover current expenditure, capital expenditure or both, off-budget
funds can be included or not
• Can be calculated on the primary balance or on the overall balance
• Can target submitted budgets, approved budgets or realised budgets
– Can require compensating for realised deficits or not
• Can be calculated on actual or structural balances, and the definition of
“structurally balanced” can differ
• Can be calculated annually or multi-annually
• Finally, they can be calculated in cash or in accruals
The Devil is in the Details! Budget Balance Objectives

6. • Applied to individual SNGs (*)
• Applied to the current budget only (Golden rule)
• Calculated on realised balance
– And require to compensate with equivalent surpluses in the following year
• Applied on an annual basis
• Calculated in accruals (*)
(*) from secondary research as not in the survey questions
Most frequent characteristics of BBOs

7. Stringency of the BBO according to the coverage and
target of the rule

8. Accrual Cash TOTAL
Annual IRE, NZL, SVK, KOR,
MEX, PRT, NLD, IRL
LTU (small)*, LUX,
POL
10
Structural FIN, LTU (4 large)*,
NLD
3
Multi-annual
(years)
FIN (4) ESP (3), SLO (4) 3
TOTAL 12 5 17
Stringency of the rule depending on the accounting
standard and the cyclicality of the rule

9. BORROWING CONSTRAINTS AND
EXPENDITURE LIMITATIONS

10. Nb of countries
Restrictions on SNG borrowing
9
4 4 3 4
2 3
7
11 10
5
0
4
2
4
7
20
14
9
3
8
4
7
14
0
5
10
15
20
25
Approval
from
central
government
on
borrowing
is
required
Restrictions
are
limited
to
specific
purposes
(e.g.
for
investment
only)
There
are
no
restrictions
Borrowing
is
prohibited
Borrowing
abroad
is
prohibited
Borrowing
is
limited
to
specific
lender
institutions
Other
Not
used
Current Capital Total
Most frequent borrowing
constraints:
- Requiring approval
from CG
- Restricting to specific
purposes (in particular
public investment)

11. CG limitations on SNG expenditures
(both increases and reductions)
14
8
2
5
13
4 4 4
0
2
4
6
8
10
12
14
16
Not used Set for overall
expenditure
Set for the current
(operating)
expenditure only
Set for individual
expenditure lines
only
Mandatory in nature Recommended or voluntary
Nb of countries
- Can be set for individual
municipalities or on
aggregate
- Individual budget lines =
usually personnel
expenditure
- Can sometimes be
minimum expenditure
levels (ex. On health or
education)

12. MONITORING AND ENFORCEMENT
MECHANISMS

13. Country
Ceilings and targets
set by
Reference to the legislation
Austria
Intergovernmental
agreement
Austrian Stability Pact (2012)
Brazil Complementary Law (1) Fiscal Responsibility Law (2000)
Germany (BBO) Constitutional Law Basic Law (2009, art. 109, 115, 143dGG)
Hungary Ordinary Law Act on the economic stability of Hungary (2011)
Latvia Ordinary Law Law on Local Government Budgets
Lithuania (BBO) Constitutional Law
Constitutional Law on the Implementation of the
Treaty (CLIFT)
Lithuania (borrowing
limits)
Ordinary law Annual budget law
Mexico Ordinary Law
Law of Financial Discipline for States and
Municipalities
Law of Fiscal Coordination (2018 reform)
Netherlands
Ordinary Law
Ordinary Law
Municipalities act
Governments Accounts Act (Comptabiliteitsewet)
Poland Ordinary Law Act on Public Finance
Portugal Ordinary Law Local and Regional Finance Laws (2013)
Sweden Ordinary law Local Government Act
ZAF (state) Ordinary Law Borrowing Powers of Provincial Governments Act
Spain (state) Ordinary law
Organic Law 2/2012, Budgetary Stability And
Financial Sustainability and Amendment Law
4/2012.
Statutory base for FRs for SNGs
- The principles for FRs are
often set in the constitution
or constitutional laws, and
often for the general
government level.
- Details on the targets and
allocation of ceilings across
levels of government are
often left to ordinary
legislations.
- However, some countries
set the FRs and targets for
SNGs in constitutional laws

14. Who monitors the compliance with fiscal rules?
8
7
4
2
6
2
0
1
2
3
4
5
6
7
8
9
Higher level of
government
SNGs themselves Other
Local State
Average number of countries per fiscal rule
- Ministries of Finance,
Ministries of Interior
and Independent Fiscal
Institutions are the main
institutions responsible for
monitoring compliance of
SNGs with FRs, identifying
SNGs at risk of facing fiscal
difficulties, and imposing
corrective measures.
- Many SNGs monitor
compliance themselves
(especially State level)

15. • Reducing access to specific types of grants
• Imposing corrective measures
• Imposing sanctions
• Replacing SNG officials
• Forcing municipal mergers
• In some countries, ministers’ salaries and rewards are also
linked to the compliance with budgetary targets.
Actions in case SNGs breach the FRs

16. • Early warning systems
• Reforming revenue allocation and expenditure
responsibilities to prevent building of SNG deficits
Actions in case SNGs face financial difficulties
– ex ante

17. • Formal bailout mechanisms (must ensure sufficient cost to reduce risk
of moral hazard)
• Reducing access to specific types of grants
• Imposing corrective measures
• Imposing sanctions
• Replacing SNG officials
• Forcing municipal mergers
• In some countries, ministers’ salaries and rewards are also linked to the
compliance with budgetary targets.
Actions in SNGs face financial difficulties
– ex post

18. THANK YOU
TO CONTACT THE AUTHORS:
Camila Vammalle: Camila.VAMMALLE@OECD.org
Indre Bambalaite: Indre.BAMBALAITE@OECD.org