Budget stability in Spain (2. The budget stability law in Spain)

Budget stability in Spain (2. The budget stability law in Spain)
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Budget stability in Spain*
Luis Espadas**

* This article is a reproduction of the author's lecture at the XXX International Seminar on Public Budget, organized by the Public Budget International Association (ASIP), the Ministry of Finance and Prices of the Republic of Cuba, the Cuban Public Budget Society and the National Association of Economists and Accountants of the Republic of Cuba, in Havana, Cuba, June 9 to 13, 2003.
** General Subdirector, General Subdirectorate of Public Budget, Ministry of Treasury, Spain.

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2. The budget stability law in Spain

As a response to the set of requirements previously discussed, Spain enacted Law number 18/2001, dated December 12, 2001: the Budget Stability General Law. This law embodies the basic ruling principles and regulations for the whole national public sector, and the procedures leading to their strict enforcement in the State sector, as an administration that is part of the public sector, and some rules specifically addressing it.

Regarding the contents of this Law, it is important to highlight, in the first place, the previously mentioned principles -stability, pluriannuality, transparency and efficiency- and other basic regulations applicable to the whole public sector. Specifically, among the latter, and having a significant relevance in the public finance decision-making field, is:

  • Establishing the budget stability objective.

On the other hand, it is necessary to analyze the regulations or procedures enforced by the Law which are exclusively applicable to the state field:

  • Establishing a maximum annual limit of non-financial expenditure.
  • Establishing a pluriannual budget scenario.
  • Creating a budget execution Contingency Fund.
  • Making a plan to correct imbalances.

2.1. The objective of budget stability

The objective of budget stability has a three-year horizon and is established for the public sector as a whole and each group of agents composing it.

This is a government agreement that must be approved in the first four-month period of each year, on the joint proposal by the Ministries of the Economy and Treasury, prior to reports by the Fiscal and Financial Policies Council of the Autonomous Communities, and by the National Commission of Local Administration, related to the specific objectives of the respective groups of agents.

The Agreement must be previously and consecutively subject to the approval of the members of the House of Representatives and the Senate, thus acquiring legislative support. The law takes into account its eventual rejection by both Houses, and establishes a period of one month for the Government to submit a new agreement. (Figure 1)

2.2. Annual maximum limit of non-financial spending

Directly regulating the making of the State General Budget, the General Budget Stability Law states that the Government Agreement establishing the objective of budget stability "shall set the amount that will be the maximum non-financial expenditure limit of the State Budget. This budget allocation process must have the approval of the General Budgets of the State for the subsequent year."

In view of the process underwent by the Agreement, in which the Houses approve the "objective", when they could have otherwise been required to approve the "Agreement", it is evident that the expenditure limit is approved by the Government and not by the legislative body, which only acknowledges it as part of the Agreement. However, it is a formally acquired commitment, and any failure to comply with it should be properly supported and would affect the overall budget debate.

In any instance, we are facing an important change in the budget process: namely, the moment that the annual spending volume is established has been significantly moved forward. If the budget was originally for the second two weeks of September, it should now be budgeted in the month of April at the latest.

In turn, this circumstance changes the budget negotiation strategy since it is no longer possible for managers, as it has been up to the present, to defend the allocation of an open sum for their needs through the budget process. Since the total amount of the budget is already pre-established and closed, the different sectors must compete to achieve the necessary allocations for their programs.

However, it seems relevant to simultaneously determine the objective of deficit and the amount of expenditure, since -regardless of the difficulties arising from the anticipated determination related to budget presentation- both concepts are closely related. The amount of expenditure is a financial concept with initial amounts, a maximum limit in liability acquisition and whose execution needs to be authorized. Whereas the deficit objective is the final balance of acknowledged income and expenditure, whose temporary scope arise from the terminology established by the National Accounts methodology. (figure 2)

Therefore, it is somehow necessary to establish homogeneity in estimating both concepts in order to ensure their consistency.

The concretion of budget planning and execution, shown as figure 3, contributes the necessary information to relate initial expenditure and lending or borrowing capacity. However, in the process of estimating an expenditure limit compatible with a specific objective, in addition to the need of inverting the course of the process, the path to be followed seems to be full of questions. Some of these questions arise from budget execution uncertainty; others from the erratic adjustments to be carried out that, historically, do not follow known rules; and finally others, computable due to their relevance in the NA, that do not even appear in the budget.

Assuming all the risks implied by answering such questions, a deficit objective of 0.4 per 100 has been established for the 2004 fiscal year. This objective was set up by the March 14, 2003, Agreement established for the State budget which allows, due to the development of income expected by the Stability Program, non-financial expenditures in the order of †117,260m, which is the limit established by the Agreement.

(In millions of euros)

Millions % GDP
1. National Accounting DEFICIT 3.417 0,4
2. NA non-financial income 110.321 14,2
3. NA EXPENDITURE LIMIT (1+2) 113.739 14,6
4. National Accounting Adjustments 590 0,1
5. Execution Adjustments 2.931 0,4
6. Other adjustments 0 0
7. NON-FINANCIAL EXPENDITURE LIMIT (S 3 through 6) 117.260 14,8

2.3. Pluriannual budget scenario

The General Stability Law calls for the creation of pluriannual allowance scenarios related to income and expenditure. This is another innovation introduced by the Law in our budget process, in compliance with the annual validity of budget laid down in the Constitution.

On the one hand, it clearly establishes the stability objective agreed on for a three-year period, as a result of a strictly foreseen behavior of income and expenditure. On the other hand, it establishes a contrast between budget priorities that provide consistency to expenditure expectations and to managers' needs, granting a reasonable period of time for the implementation of the necessary policies to maintain the expected course of public budget in the different policy dimensions, or, if regarded as politically suitable, to correct the income path with plenty of time for the implementation of any change to be adopted.

In addition to the basic allowance nature of any pluriannual scenario, the law guarantees that all parties involved in the expenditure process will comply with it. It establishes that "Bills, statutory provisions, administrative acts, contracts and cooperation agreements, and any other action carried out by the subjects referred to in section 2.1.a) and b) of this law, having budget effects as they imply public expenditure changes, shall comply with the pluriannual financial environment established by the previous paragraph and, consequently, for approval purposes, they should be included in such pluriannual budget scenarios. (Section 12.2.)" This rule implies the application of the efficiency principle to the State in the allocation and use of public resources, the same principle of the General Budget Stability Law, and tries to provide a regulatory nature to the scenario, limiting the future economic and financial dimension of administrative and government decisions. In this way, budget appropriations, which must comply with a certain performance in future budgets, will have a guaranteed feasibility in the stability context required by the Law.

Therefore, the law establishes that scenarios should specify the expenditure commitments of each budget policy and, for this purpose, it is very important to know which part of a policy or line of expenditure has allocated allowances to specific actions, and which other part has available allowances that can be allocated to new initiatives, with a still specific uncommitted volume of expenditure. The short-term inflexibility of budget commitments requires this future expenditure regulatory instrument to contribute some degree of freedom to allowance decisions (decision margin.)

2.4. Allowance of a budget execution Contingency Fund

The Budget Stability Law has not only introduced changes in the budget planning process, endowing it with the already discussed pluriannual view and modifying budget calendars and rules, but it also addresses the execution stage of expenditure, aiming at a stricter execution of the approved budget, while simultaneously allowing a flexibility margin within the total annual expenditure scenario.

The budget execution Contingency Fund must be annually established for an amount equal to 2 per cent of the total non-financial expenditure of the State Budget, in order to meet any need that may arise in the course of budget execution. This need may be of a non-discretionary nature and may not be included in the initial budget, or -obviously- could be allocated therein as an amount smaller than the one resulting from its normal execution.

On the one hand, the purpose of the Fund is to facilitate meeting unforeseen needs up to 2 percent of the total amount, in such a way so as not to change the total amount of the non-financial expenditure authorized by the General Courts through the approval of the annual budget. On the other hand, the purpose is to limit the implementation of non-budget expenditures to this amount through the different figures of budget change currently regulated by the General Budget Law, since all of them must be financed by this fund, or by cutting other appropriations.

Transfers of appropriations are excluded from this restriction due to the very nature of change and the generation of appropriations resulting from the provision of specific resources.

Thus, the main objective is to foment the credibility of the budget as an instrument limiting public expenditure, guaranteeing that the Government, in performing the approved budget, will comply with the approved expenditure.

Specifically, the changes to be financed by the Contingency Fund are the following:

  1. Increases
  2. Special appropriations and appropriation supplements
  3. Additions constituting exceptions to the annual budget principle, and corresponding to expenditures that, having a legally established allowance in the previous period, were cancelled upon the end thereof.

The Fund is not expected to finance the following changes:

  1. Any generation of appropriations, in the case that these correspond to higher previous income that causes them and finances them.
  2. Transfers, within the limits established by law, that do not require financing by their own nature of qualitative change.

This is related to the very budget organic field of the Fund; i.e., the budget of the State, and with relation to non-financial transactions.

Once the scope and the figures of change whose financing is covered by this Fund have been established, the Fund is characterized by additional notes limiting its coverage to expenditures meeting special requirements:

  1. These must be new needs, at least, needs that were not anticipated at the time of budget planning.
  2. They must answer to needs that cannot be postponed, of which satisfaction cannot be postponed to the subsequent year.
  3. Expenditure cannot be financed by redistributing other appropriations, either by cutting or simple transfer.
  4. The need must be of a non-discretionary character, excluding political or administrative discretionary events, the most meaningful example of which could be to give unexpected additional momentum to investments throughout the course of the year.

The allocation of the Fund is reserved to the Council of Ministers, and the Government must submit to Parliament quarterly reports on the use thereof.

The Law concludes the regulation of the Contingency Fund by establishing the cancellation, at the end of each fiscal year, of any remaining stock, expressly forbidding the incorporation thereof into any subsequent year.

2.5. Imbalance adjustment plans

Finally, and it could not be otherwise, the Law also takes into account the remote possibility of there being a deficit budget (figure 8), or that the imbalance be a result of the execution process.

In these instances, the Government shall submit to Parliament an economic-financial plan to correct the imbalance, specifying any measure to be adopted regarding public income and expenditure for the three subsequent fiscal years, in order to correct the imbalance.

When this imbalance takes place in the corporate field of the State, the agencies having incurred losses should draw up a management report stating the reasons thereof and, accordingly, a reorganization plan.

Applicable to the public sector as a whole, the Law establishes that those administrations responsible for Spain's incompliance to the EMU shall be accountable for all imputable responsibilities due to such failure to comply. Figure 8 sums up the elements previously referred to and also includes the existing allowances for the 2004 fiscal year.

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