The budget policy in the European Union after Maastrich
Andrea Monorchio

_{2. Part II}

The General Accountant's Bureau in Italy: Structure and Operation*
*The text that follows is the transcription of the answer to the question made by Mr. Roberto Martiene, National Budget Director in Argentina, after the lecture delivered by Mr. Andrea Monorchio.

The State General Accountant's Bureau is composed of ten General Departments in Italy. One of these General Departments, of which I was General Director myself, is called the General Budget Department. It is headed by a General Director. This Department prepares and manages the State budget for the term of a year. In order to prepare the budget, which involves a very complex and complicated document, we need, above all, the collaboration of the administration. Thus, the Accountant's Bureau has its own office in each Ministry, namely the Control Office and the Connection Office as far as the elaboration of the Budget is concerned.

As regards to the elaboration of the Budget, in the month of March every year, the Accountant's Office prepares a circular with the instructions which, signed by the Treasury Minister, are delivered to all the State administrations. In Italy, as in Argentina, there are diverse Government levels. I am referring to the Budget of the Central Government. The Provinces make their own budgets. The municipal corporations also make their own budgets.

The Treasury Ministry provides the current macroeconomic framework in this circular: the inflation rate, unemployment rate, spending, both in monetary and real terms. In order to make the income prevision, it is necessary to know all the economic grounds exactly as they are estimated at that time. Each one of the administrations requires its own Budget. In Italy, the income prevision statement is only one and then there are various statements of expenditure prevision, one for each Ministry. The Presidency of the Ministers' Council is considered as a Ministry; therefore, it has its prevision statement. Despite not being a Ministry, the Council Presidency has its functions, many offices; thus, its has its own prevision statement.

The administrations, headed by our Budget Central Office before the Ministry, organize their statements and they are delivered to us by electronic mail. The computer of the electronic system gathers all the data. Thus, once all the administrations have completed the delivery of their previsions, I become acquainted with the administrations' budget. The administrations' budget, in general, is a budget which does not correspond with my expectations and even less with the Treasury Ministry's expectations. Why? Because even if the Treasury Minister, before the Ministers' Council, states that “the expenses of the planned inflationary rate must be increased, the advisory services' expenses must be reduced, they must be reduced...”. Each Minister thinks that this is valid for the others who are sitting there but not for him/herself; therefore, each one is concerned with his/her area.

We immediately proceed, in our capacity, to introduce modifications. The Treasury Minister is first “among his peers” at the Ministers' Council. If he has a strong Council President supporting him, he is strong as well. Minister Ciampi was successful in the Maastrich issue because the Council President, Mr. Prodi, whom you met during his visit in Argentina, was a strong President, a President who supported his Minister.

Therefore, we revise and modify the previsions. And we modify them not only taking the departments into account, but also because we get to know the macroeconomic framework better during that period of time.
We, like you, know that a Budget is much more accurate when it has been prepared closer to the time of development. If I prepare a Budget now, in the month of July, I will face a very strong variance. If I prepare this very same Budget in October, the variance will be quite lower in the month of November because during that time period I could rely on the whole previous history. All of us know this.

The Italian State Budget is both a Competence and Cash Budget. We have a double Budget. Competence and Cash. Competence is a Budget of law, the Cash Budget is a Budget of fact.

But once the Treasury Budget is completed, our work is not done. Because we must consolidate the State Budget with the Budget of all the other entities. Then, we receive information about the Budgets of the regions, the provinces, the municipal corporations. How do we receive them? In each province capital we have a General Accountant's Bureau agency that performs this data gathering task. At this moment, we merge the data. It is a very complex operation because, as you all know, we do not create figures, the figures are the final dynamic expression. We create behaviors. I must foresee the behavior of the expenditure of nineteen regions which have Regular Bylaws, five regions with Special Bylaws and two autonomous regions: Trento and Bolzano.

I must project the behavior of the expenses of almost eight thousand municipal corporations, one hundred and two provinces, two hundred health care services, all the hospitals in Italy, all the Universities. It's very complicated indeed. But I am very proud to say that we erred by very little. Having an expense budget of one million milliards and an income budget of nine hundred and fifty thousand milliards, a one per cent error average implies nineteen thousand milliards over the expense and nine thousand five hundred milliards over the income, and upon the error we must be serious, because with the financial allotment we must be serious. Without having made a mistake myself, I erred nineteen thousand milliards, almost twenty thousand milliards. In statistics, a 1% error is no error.

As regards the income previsions, they are carried out by the Ministry of Finance. But we do not trust the Ministry of Finance. We make the previsions by ourselves. We go and observe like medical doctors do. In this sense, in my capacity as a Budget man, I will give you a suggestion. We use a double method to make the previsions. We use the aleatory method and the deterministic method. The aleatory method is made with ergonometric models. The basis. The deterministic method is the method made with the estimation, with the estimators' experience; a group of persons who observe and then compare if the variance has been low. In this case, the prevision was good. But if the variance is strongly marked, they analyze where the error causing it lies. We have the Italian economy model. It has four thousand equations. Even when there are economic policy decisions, we add the decision and we observe how the decision acts on the economy and how the economy interacts on the Budget. Then, we see what the effects on the Budget are.

We made the calculations on the basis of the “rotamazione” (exchange plan). I will explain what the so-called “rotamazione” is. It caused the growth of the Gross Domestic Product by almost half a point. In 1997 we gave a fiscal incentive to all those people changing their automobile. The fiscal incentive was a motivation for consumption. Many people changed their automobiles. FIAT, LANCIA, even other foreign companies manufactured many vehicles, calculating that the fiscal loss was by far compensated by the amount of the sales, so that the added value amount which we would have obtained presented no difficulties to the manufacturers. But the model told us this and the model showed us an outcome worth heeding.

The Budget elaboration takes another phase into consideration, which is developed at Parliament level. It is the presentation by the Government before May 15 of a document on financial-economic planning. The financial-economic planning document covers the three-year period and it is updated every year. Therefore, in 1998 we already have information about 1999, 2000 and 2001. Now, before May 15, we must draft another document which updates the estimation for the years 2000 and 2001 and it adds 2002. Now, we will make it quadrennial. As a matter of fact, an estimation in over one year marks only a tendency, because we do not know what will happen. If we usually err the estimations from one year to the other!... In September 1997 we sustained that for 1998 the growth would be in the order of two and a half percent; then, during the course of a year we began rectifying until we found, at the end of that year, a scarce one per cent growth. I mention the economic growth because it is one of the most important patterns for the Budget, for preparing the loss issue. The International Monetary Fund, the OXE, the European Union, our Central Bank, have all calculated that a one point lower economic growth, in real terms, causes a 0.6% variance in the losses. In Italy the reactivation is lower, for which a one point lower growth creates a gap in the Budget of approximately 0.4% derived from the intervention itself.

Due to the Italian automatic readjustment mechanism of the Budget we have a lower impact. How do we proceed with this document? We make a tendency projection of the public finance data for the period considered and we analyze the result. Then, if we want to reach a certain result, we make the programmatic projection. The difference between the tendency projection and the programmatic projection gives the correction that we must make: the correction on the income, the correction on the expenses. In order not to confuse the political correction with the political decision, as regards the correction derived from the economy we use either the tendency framework or the programmatic framework, the same macroeconomic framework, which is a programmatic macroeconomic framework. We use it even for the financial one, because the difference between the tendency framework and the programmatic framework is due only to the political decision. If I have a sixty thousand milliard lira deficit and I want to reach fifty thousand milliards, I know that those ten thousand milliards are the result of the political decision and not the effect of the economy affecting the Budget. This is clear. This construction system, which is also shared by the International Monetary Fund, deeply divides the Italian economists. In my opinion, it is Parliament which must seriously analyze the decision. Decision cannot be confused with the economy effects which act on everyone. The Italian Parliament is a parliament with ample power, a power that goes beyond reason.

In my opinion, the Constitution should be modified, particularly as regards the terms of the Government-Parliament relation. I have recently stated that the Government has a physical position. What is meant by a physical position? The Government has seats in Parliament. The Government holds them without power. The Palazzo Chigi is the headquarters of a powerless Government. Because the Parliament goes beyond the Government's will. The government must be responsible. The Government must have full power with respect to the Parliament in Budget matters. The Italian Constitution is a beautiful Constitution.

If you read it, you will feel the desire to engrave its wording on granite. It is my land's granite, a very hard one. But it is a co-decisional type Constitution. What does co-decisional mean? Together with the Government's initiative, the initiatives of all the subjects to whom the Constitution recognizes power of decision are placed on an equal standing. Therefore, we submit the Budget before Parliament. Section 81, first sub-section of the Constitution: every year the Government presents the Budget to the Parliament House. Constitutional reserve: no parliament member may present the Budget. The Budget is only presented by the Government.

The English Constitutions appeared as a result of the Budget rite, which is the basic rite of the countries and the people. But in England, the Budget may be altered by the parliament members with the presentation of modifications. I do not deny that the Budget may be modified, but the Budget must be discussed within the Government itself, because the Budget is the government's responsibility. The International Monetary Fund is the government's responsibility. The European Union is the government's responsibility. On its behalf, Parliament seeks consensus, the consensus passes through the resources: the distribution of resources. Parliament approves the financial-economic planning document, which also designs the macroeconomic framework. What the growth in real terms will be, what the growth will be in monetary terms. It also establishes, then, the inflationary rate, and how much the unemployment rate will increase. What the dollar price will be, what the German Mark price will be.

Today, these changes are irrevocably fixed in the European Union area.

We later include this planning document position in the Budget. As the document has meanwhile been elaborated, our task is to adjust the Budget entries. Whilst we analyze the programmatic tendency we know the correction level to be made. At this time, we need to know if such correction is complied with in the income, in the expenses or in both. Italy has the problem of a very high fiscal pressure. My country implemented an important adjustment in order to participate in Europe's economy. It wished to participate in this economy which is why we have an important fiscal investment, although the evasion level is also very important. Although, in recent years, various Finance Ministers have recovered a certain fiscal evasion percentage, the same still remains consistent. Therefore, the Government, through the Treasury Minister, decides what is the correction to be applied over the income sector and the extent to be applied on the expenditure sector. Then the measures are identified in order to implement the corrections on the retirement pensions, compensations, purchase of property and services, also taking into account the estimation of the interest expenses. Because, as the Undersecretary said yesterday, the interest expenses in Italy are very high, as they are in Argentina.

But if the interest expense represented and still represents a problem, it has also acted as an exhaust valve.

Between 1997 and 1998 the convergence rates made us save approximately thirty thousand milliards: one point and a half of the GDP over the interest expenses, which allowed us to overcome the lower economic growth problem. In this manner, the 1999 objective in terms of public finance was only reached due to the interest expense.

For the purpose of preparing the Budget, it is also important to recall that we rely on the government's General Statement of Accounts.

All of us know that the history of the past is very important to define the future projection. Thus, a close analysis of the statement of accounts is presented to the Parliament on June 30, so that the parliament members may evaluate the information at the moment when the new year Budget will be discussed, which is presented on July 31, to be then debated during the first days of the month of October. At the same time, we submit the Compensation Budget, a Budget in which the deficit approved by Parliament cannot be varied, although internal compensations may be effected. Why? Because the Budget is made several months before putting it into effect which means internal compensations become necessary. In our country, in the past, the elemental unit of the Budget was the expenditure chapter. The chapter was an expense object. Office expenses, for example, were a daily chapter. This division was very rigid, which is why in a recent reform, we created the basic prevision units which include diverse chapters, which has given more flexibility to the Budget.

The Budget is presented in July. In the month of September, another two documents are presented with the Budget. So there are three documents: two bills and a document. The two bills are the Finance Law and a related Provision, which is the Provision that enforces the measures of correction and of income, apart from the expenses and the programmatic projection report, a report by which the Treasury Minister provides the updated economic prevision. It is a complex and difficult process because, for example, due to the constitutional provision of section 81, the Budget Law is a formal Law. That is to say, it has the form of a Law but does not innovate in third-party rights. Thus, in order to modify the Budget Law it is necessary to use the Financial Law and the Related Disposition. Thus, the Budget decision is framed on three instruments: the Budget Law, the Financial Law and the Related Provision. Now, since there is no difference between these two instruments, we will probably make a single instrument to thus obtain the Budget and the Financial Law. What is this Financial Law? When in 1977 Italy was undergoing an important financial crisis, it was verified that the Budget did not allow corrections in the public finance, since, being a formal Law, the Budget was nothing but the recognition of all the Laws that governed the income and expenses matters, drafted with the prevision. Period. We, however, invented this Financial Law, borrowed from the French system. In the French system “le annuaire de finance” is the Budget Law. On the other hand and as contrasted with the French, we have “le annuaire de finance” which serves to modify the Budget Law.

Therefore, we presented the Budget Law.

The Budget Law has fifty thousand milliards of income and one hundred thousand milliards of expenses. We want to increase the fifty thousand milliards of income to sixty thousand. With the Financial Law or Related Law, we dispose of those ten thousand milliards that we need to increase.

We want to correct the expenditure, to reduce it from one hundred thousand to eighty thousand. With the Provision, with the Related Law, we make the correction to bring the expenses from one hundred thousand to eighty thousand milliards.

I have tried to explain, in simple terms, a highly articulated and complex process.

Thank you very much.