Stefania Zotteri

Pension Expenditure Projections, Pension Liabilities and European Union Fiscal Rules

In the current debate on the European Union (EU) fiscal rules there is a widespread consensus on the need to place more focus on government debt and long-term fiscal sustainability in the surveillance of budgetary positions. More specifically, pension developments should be taken into account in assessing fiscal sustainability. The way to make this operational has not yet been defined. The paper examines the pension expenditure projections available in EU countries and their use in the assessment of fiscal sustainability. While acknowledging the progress in the availability and quality of projections, the paper notes that their comparability is still unsatisfactory. Any mechanical use of existing pension expenditure projections should therefore be avoided. The paper also examines the different definitions of pension liabilities and their potential role in the EU fiscal framework. It argues that pension liabilities may bring a clearer understanding of the impact of fiscal policies, may provide a measure of the cost of terminating pay-as-you-go pension schemes and may be useful for the measurement of deficits computed on accrual basis. However, the level of pension liabilities does not provide indications concerning the sustainability of pension schemes and their effects on public budgets. Pension liabilities should not be added to conventional debt. The paper argues that both pension expenditure projections and estimates of pension liabilities can complement the deficit and debt indicators currently used in the EU fiscal rules. The paper concludes by pointing to the need of improving some technical and organisational aspects concerning age-related expenditure projections, such as the independence of forecasters, the transparency of projections and the homogeneity of methods.

Cyclical Asymmetry in Fiscal Variables

In a stylised framework of fiscal policy determination that considers both structural targets and cyclical factors, we find significant cyclical asymmetry in the behaviour of fiscal variables in a sample of fourteen EU countries from 1970 to 2004, with budgetary balances (both overall and primary) deteriorating in contractions but not improving correspondingly in expansions. Analysis of budget components reveals that the asymmetry is due to expenditure, in particular transfers in cash. We find no evidence that the fiscal rules introduced in 1992 with the Treaty of Maastricht affected the cyclical behaviour of the variables examined. Numerical simulations show that cyclical asymmetry inflated average deficit levels, contributing significantly to the accumulation of debt.

Rainy Day Funds: Can They Make a Difference in Europe?

Rainy Day Funds (RDFs) have an important role in the USA. They allow States i?½ which usually have rules requiring a balanced budget for current revenue and spending i?½ to limit procyclical fiscal policies. This paper examines the possible role of RDFs in the European fiscal framework. The analysis suggests that RDFs would not fundamentally alter the incentive problems at the root of the difficulties in the implementation of the Stability and Growth Pact. Moreover, RDFs are not an option for countries with high deficits. However, for low-deficit countries, RDFs can lessen the rigidity of the 3 per cent threshold in bad times. RDFs could be introduced on a voluntary basis at the national level and could contribute to make the rules more country-specific. The introduction of RDFs would require a change in the definition of the i?½Maastricht deficiti?½: deposits and withdrawals should be considered respectively as budget expense and revenue. In this way, the balances held in RDFs could be spent in bad times without an increase in the deficit. To ensure that RDFs are not used opportunistically, deposits should only be made out of budget surpluses and circumstances allowing withdrawals should be specified ex ante.

Public Debt: A Survey of Policy Issues

The role, the limits and the effects of public debt have long been at the core of the fiscal policy debate. Public debt affects the allocation and distribution of resources and the stabilisation function of government. It reflects decisions taken by previous generations and it constrains those of future generations. History has seen numerous episodes of debt accumulation driven by different economic and political factors. Debt decumulation via consolidation, inflation or default has frequently proved economically problematic and has produced significant political consequences.The debate on public debt has involved economist, philosophers and policy makers, and has highlighted many, sometimes radically different, views. Ricardo refers to the debt as “… one of the most terrible scourges which was ever invented to afflict a nation”, as “… a system which tends to make us less thrifty, to blind us to our real situation”. He feared that the citizen initially “deludes himself with the belief, that he is as rich as before” and then, faced with the taxes levied to pay for the debt, is tempted “… to remove himself and his capital to another country, where he will be exempted from such burthens”. Smith argued that government borrowing would deprive society of resources which could be invested more productively. He also noted that beyond a certain threshold debt inevitably leads to national bankruptcy.However, classical economists were also well aware of the necessity of allowing borrowing in certain circumstances and of its usefulness in others. Building on such awareness, gradually the idea gained consensus that the public debt need not be repaid as it can be refunded and that “the problem of the debt burden is a problem of an expanding national income. How can a rapidly rising income be achieved?” (Domar, 1944, p. 166).This paper aims at providing a concise overview of the main issues surfacing the debate over public debt. In Section 1 we review the main economic factors explaining the existence of debt from three perspectives: public finance, monetary policy and political economy. Section 2 takes a positive point of view and is dedicated to the definition of debt sustainability and to the analytical tools available to undertake its assessment. Section 3 discusses the implications of high debt levels for the macroeconomic performance of the economy. Section 4 turns normative and considers market and rule-based mechanisms to control debt growth. Section 5 and 6 are devoted to more technical aspects concerning both analysis and policy: the former examines the issues arising when measuring public liabilities, the latter considers how fiscal rules and indicators can affect government debt management.

Fiscal Rules for Subnational Governments: Lessons from the EMU

The fiscal rules adopted in the context of Europe’s Economic and Monetary Union (EMU) have extensive implications for European Union (EU) governments at all levels. This chapter focuses on the impact of EMU fiscal rules on the relationship between national and subnational governments, with particular reference to five member countries.2

Il Patto di stabilità interno due anni dopo: norme più morbide, risultati più deludenti

Il Patto di stabilita interno due anni dopo: norme piu «morbide», risultati piu deludenti (di Fabrizio Balassone e Stefania Zotteri) - ABSTRACT: A Domestic Stability Pact (DSP) has been introduced in Italy in 1998, in order to involve Regions and other local authorities in the effort to attain the objectives set for the budget of the general government under the European Stability and Growth Pact. The paper analyses how the legal framework of the DSP has evolved since its introduction. It is argued that while certain features of the DSP were ill-suited to the goal it pursued from the start, subsequent adjustments have further weakened the DSP: on the one hand, they have reduced the credibility of the budget constraint introduced by the DSP; on the other hand, they have made the DSP constraint more slack. The paper also carries out an assessment of the results obtained by the DSP in 1999 and 2000: a)local government net lending displays a dynamic divergent from the one of the DSP balances; b) as for Regions, actual DSP deficits were higher than targeted in both years, in spite of the weakening of constraints; c) as for Provinces and Municipalities, while the actual deficit was better than targeted in 1999 (by some 3 trillion lire), it was just in line with the targets in 2000, thanks mainly to the changes introduced in the DSP. This results must be regarded as preliminary as they are partly based on estimates for 2000; the delay with which final data on the DSP deficit become available witnesses another weakness of the DSP, i.e. the difficulty met in monitoring its implementation both during and at the end of the year. JEL C70 E61 H50

The tax burden on banks over the period 2006-2014

Following the establishment of the Single Supervisory Mechanism (SSM), concerns about having a level playing field become more important due to the heterogeneity in bank taxation rules across Europe: measuring the tax burden can provide a first rough measure of the extent of heterogeneity across countries. After a review of the main differences in banks taxation between Italy, France, Germany, Spain and the UK, the paper provides estimates for the tax burden and deferred tax assets in these countries over the years 2006-2014; the impact of differences in taxation on bank profitability is also examined. Moreover, the paper carries out a more in-depth analysis of Italian banks by considering both individual balance sheet data and aggregate tax return data. The impact of tax measures on financial stability and on profitability is further analysed. The comparative analysis points to a wide heterogeneity across countries in the tax treatment of the banking sector. This suggests that it would be advantageous to explore possible ways to make the tax systems of the countries participating in the SSM more homogeneous; a first step could be to harmonize tax bases.

La finanza decentrata nell'ambito dell'Unione economica e monetaria: quali regole?

The paper analyses the interaction between the fiscal rules applying to European Union member states and the fiscal decentralisation process, which has gained momentum in some European countries since the early 1990s. Three critical areas are identified. First, while compliance with European rules depends on the behaviour of all levels of government, it is the central government that is held accountable; this asymmetry increases the need for rules applying to lower government tiers. Second, European rules demand that the overall budget (both current and capital) be balanced over the medium term; applying this rule at the subnational level may unduly reduce capital outlays. Third, European rules allow for margins to deal with the budgetary effects of the economic cycle; replicating this feature at the subnational level may prove difficult. The paper examines the solutions available in principle to deal with these problems and compares them with those actually adopted by five European countries. It is argued that since European rules call for clear accountability and rapid adjustments, the introduction of explicit domestic rules may have marked advantages over purely co-operative mechanisms. However, the strengthening of consensus-based institutions and procedures has so far been privileged in the countries examined. While cooperation has proved effective in terms of deficit reduction, it may be sub-optimal in terms of the allocation of resources and it may not withstand stress-testing in terms of both economic and institutional developments.