A BINDING INSTRUMENT: THE DIRECTIVE ON NATIONAL BUDGETARY FRAMEWORKS

The Directive on requirements for budgetary

frameworks of the Member States (65) was

adopted as part of the Six-Pack economic governance package and will be transposed by end of December 2013. It sets out minimum requirements for Member States' fiscal frameworks in five key areas outlined below, with a view to ensuring consistency between national fiscal governance and budgetary discipline provisions from the EU Treaties and the Stability and Growth Pact (SGP). The legal instrument chosen was a Directive, to ensure the most appropriate association of uniform EU-level requirements with the variety of Member States' budgetary structures. Contrary to voluntary standards, a Directive is binding, but unlike a Regulation – through which most of the SGP rules are established – it leaves Member States the flexibility to choose the means they will use to comply with its requirements. In particular, the Directive on budgetary frameworks allows Member States to adapt their existing frameworks to the new EU rules, and leaves open the possibility of enacting – or maintaining – more

stringent provisions than its minimum

requirements. This is crucial not only to respect existing institutional settings, but also to anchor national ownership of EU rules.

(65) Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States which entered into force on 13 December 2011.

 1) Accounting and statistics: Sound fiscal

statistics are not only necessary to support national budgetary processes from budget preparation to execution, they are also crucial for a proper functioning of the EU fiscal surveillance framework. Building on the proven methodological framework provided by the European System of Accounts, the

Directive requires accruals-based data

compliant with ESA95 covering all the general government subsectors, and also regular audits, both internal and external, of public accounts. Member States are required to publish cash- based fiscal data, at a monthly frequency for each of the central and regional government and social security subsectors, while local governments are required to report on a

quarterly basis. Reconciliation tables

explaining how ESA95 data is derived from primary sources should also be made publicly available.

 2) Forecasting: Macroeconomic and budgetary

forecasts are an essential component of the budget process, as fiscal planning based on biased or unrealistic forecasts may hamper budgetary discipline in a significant manner. The Directive mandates the public availability of official macroeconomic and budgetary forecasts prepared for fiscal planning, and also

of the methodologies, assumptions and

parameters on which these forecasts are based; alternative scenarios (e.g. lower-than-expected growth) shall also be considered. Furthermore, the reliability of the forecasts can be improved through comparisons with forecasts from other institutions – such as the Commission – and independent economic institutes; other relevant stakeholders should contribute to strengthening the robustness of forecasts.

 3) Numerical fiscal rules: Well-designed

national rules-based frameworks are known to significantly enhance budgetary discipline; numerical fiscal rules can therefore provide effective domestic leverage for the SGP (itself a rule-based system defined on quantitative fiscal targets) through increased domestic

ownership of fiscal goals. While discretion is left in the definition of the numerical fiscal rules – which may target not just the debt or deficit but also expenditure and/or revenues – basic features are mandated in the Directive. These features include the requirements that the targets and scope of the rules be well defined, that effective and timely independent monitoring be put in place, that strict compliance mechanisms must exist and that well-circumscribed escape clauses should be defined. This can be relevant not only at the general government level, but also at the sub- national level, as shown in Part IV.

 4) Medium-term budgetary frameworks

(MTBFs): Although the annual budget law is

the pivotal element of fiscal policy in all Member States, most fiscal measures have budgetary implications beyond the yearly cycle; a multiannual perspective can greatly improve fiscal planning. While Stability and

Convergence Programmes are already

presented from a multi-annual perspective, they could have a greater impact on domestic budgetary debates, notably given that annual budgets are supposed to be in line with SCP commitments. The Directive therefore sets out minimum requirements for domestic MTBFs which include a fiscal planning horizon of at least three years, the embedding the MTBF into the EU fiscal framework (including reference to the achievement of the medium-term objective), revenue and expenditure projections on the basis of unchanged policy and an explicit link to annual budgets.

 5) Transparency: Increasing fiscal

decentralisation in most Member States strengthens the need for coordination between central government (which, according to Protocol 12 of the Treaty, is the level at which compliance with Treaty provisions on fiscal matters is judged), and regional and local governments, which manage an increasing share of public expenditure. The Directive promotes accountability by calling for national fiscal frameworks to appropriately cover all general government tiers and requires that

Member States establish coordination

mechanisms across subsectors, including

numerical fiscal rules. The Directive also

requires more clarity on specific items which may have an impact on budgets, namely extra-

budgetary funds, tax expenditures and

contingent liabilities.

Recent progress on adoption and monitoring

All Member States must fulfil the requirements of the Directive within the given transposition deadline, that is the end of 2013. By then, Member States must have taken all the necessary legal, institutional and procedural measures to ensure full compliance.

Euro Plus Pact partners aim for an early

implementation. If they so wish, Member States

can choose to exceed the requirements imposed by the Directive. They can also ensure that these are transposed into national legislation in advance of the deadline. This is the case for participants to the Euro Plus Pact (members of the euro area plus Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania), who pledged in mid-2011 to transpose the Directive by the end of 2012.

Sweeping reforms are underway in most

European countries. Spurred on by the

impending deadline for the transposition of the Directive, and supported in parallel by the sharing of best practice at European level through the Economic Policy Committee (EPC) Peer Review process which is described below, most Member States have recently committed to a strengthening of their national fiscal framework. In spite of different national traditions in the conduct of fiscal policy, and of different starting positions, significant reforms were undertaken in a majority of Member States in 2011 in the pursuit of better fiscal governance.

Taking stock of this progress, the Commission will prepare an Interim Progress Report for the

Directive by the end of 2012. As provided for by

the adopted Directive, the Commission will prepare a report on the measures in place across countries implementing the main provisions of the Directive by mid-December, on the basis of information to be provided by the Member States in the second half of 2012.

3.2. THE PEER REVIEW OF NATIONAL FISCAL