DS.17.03.143
by: Geert Langenus and Barbara Coppens (Economics and Research Department, National Bank of Belgium) 1 This presentation reflects the views of the authors and not necessarily those of the National Bank of Belgium
and the High Council of Finance.
Sub-national fiscal governance in Belgium: role of the High Council of Finance and new challenges1
9th Annual meeting of the PBO-IFI Network, Scottish Parliament, 7 April 2017
2
Plan of the talk
1. Intro: the Belgian fiscal landscape
2. Fiscal surveillance for Belgian sub-national governments: – current situation – effectiveness and challenges
3. Concluding thoughts: way forward?
4
Reminder: Belgium for beginners
1 Apart from 3 municipalities in the east of Belgium (German language area, about 100,000 inhabitants; blue stripes).
Walloon Region (French language area1): 3.6 mn inhabitants
Flemish Region (Dutch language area): 6.5 mn inhabitants
Brussels Capital Region (officially bilingual area): 1.2 mn inhabitants
6
Reminder: Belgium for beginners
► More complicated in institutional terms!
► The central government: ● federal government
(most important taxes, defence, justice, etc.) ● social security system
(unemployment, pensions, etc.)
► The sub-national level: ● 6 (5) 1 “State” governments:
■ 3 Regions: Flemish, Walloon and Brussels Capital Region (in charge of e.g. economic policy, land use, employment, agriculture, housing, etc.)
■ 3 (language) Communities: Flemish, French and German-speaking Community to some extent non-territorial (in charge of e.g. education and cultural policies)
● a thick layer of local governments (10 provinces, 589 municipalities, 195 police districts, etc.)
1 Flemish regional and community institutions are merged.
7
Expenditure decentralisation – State spending (state spending in % of total government expenditure)
The ‘federal’ EU countries
10
15
20
25
30
35
40
45
50
55
60
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Canada Switzerland US
Other federal countries
Source: OECD.
10
15
20
25
30
35
40
45
50
55
60
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
BE AT DE ES
8
federal government social security regions and communities local government
Belgium – Primary expenditure breakdown: shift from federal government / social security to regions and communities (% of final primary expenditure of general government)
Source: NAI.
20.6
41.3
24.1
14.0
1995
21.4
39.9
24.7
14.0
2005
16.7
36.8
32.6
13.8
2015
9
Most recent phase in devolution: 6th State Reform, SR6 (2014)
► Further devolution of federal competences: ● Regions
■ labour market policy ■ tax abatements in the field of mortgages, investment in energy savings, and service
vouchers ● Communities
■ family allowances ■ care for the elderly ■ other health care expenditures
● total = close to 5 % of GDP (at unchanged policy) ● p.m. bulk of social security (pensions, most of the health care, unemployment
benefits) remains at the central level!
► Reform of the financing of the Regions and Communities: ● financing the new powers and revision of the existing grant system ● special provisions for the Brussels Capital Region (additional funding linked to
inflows of commuters, presence of international organisations, role of capital city) ● new solidarity mechanism (makes up 80 % of the difference between the
population's share and the Region's share in federal income tax) ● extending regions' fiscal autonomy
10
Reform of the financing of the Regions
► Own regional taxes already existed: e.g. road, inheritance and gift taxes; withholding tax on immovable property shared with local authorities
► In addition to those regional taxes Regions get tax autonomy in the Personal Income Tax (PIT) system ● 2015 figure; roughly ¼ of current personal income tax
► principle: federal PIT partly replaced by regional PIT
► Regional PIT technically levied as a percentage of the federal PIT (tax-on-tax surcharge)
► The Regions will have the competence to: ● set their own tax brackets themselves ● set the level of the additional percentage per tax bracket ● allow tax cuts
► But without any substantial reduction in the progressiveness specified by the federal government ● in practice: specific constraints for reduction on the highest tax brackets ● to avoid tax competition for the highest incomes
Regional tax surcharge instead of a “clean” split rate?
11
What about the federal government?
► Regions and communities contribute to fiscal adjustment ● pension contributions for their staff (before they did not pay any contributions in
the federal pension scheme) ● explicit ‘fiscal consolidation contributions’ (0,6 % of GDP) ● longer term: grants only partly linked to economic growth
► The federal government remains fully competent for ● taxes on company profits ● VAT ● excise duties ● withholding tax on income from movable property of individuals
► The federal government retains the main competences regarding PIT ● defining the tax base, setting the tax rate and collecting the PIT ● the Regions cannot invoke any conflict of interest at the Constitutional Court
regarding the PIT ● the tax autonomy of the Regions is defined under a strict framework to avoid tax
competition
12
Vertical fiscal imbalances decline but do not disappear
Sources: NAI, NBB. 1 Region and community are merged. 2 Corrected for the partial registration of the regional PIT in ESA 2010.
0
10
20
30
40
50
60
70
2014 2015 2
Impact of SR6: tax autonomy in the three regions (share of own revenue in total regional revenue, percentages)
0
10
20
30
40
50
60
70
0
10
20
30
40
50
60
70Flemish Community 1 Walloon Region Brussels Capital Region
13
Current experiences with greater tax autonomy?
► Very early!
► All regions have reformed – or announced reforms of – the mortgage tax abatement and real estate taxation in general ● very significant reduction in the Flemish Region as of 2015 ● minor reduction in the Walloon Region as of 2016 ● abolition in the Brussels Capital Region as of 2017 but in the context of general
overhaul of real estate taxation and shifting part of the burden to owners that rent out their property
► Other changes have been very limited! ● no changes to PIT tax brackets ● minor changes to some transferred tax abatements announced
(e.g. deductibility of service vouchers in Brussels Capital Region)
► In general, gradual and only parametric reforms of new competences (e.g. family allowances)
14
Plan of the talk
1. Intro: the Belgian fiscal landscape
2. Fiscal surveillance for Belgian sub-national governments: – current situation – effectiveness and challenges
3. Concluding thoughts: way forward?
15
Two fiscal councils
Federal Planning Bureau ● macro projections for the budget ● operationally independent ● checks and balances within
National Accounts Institute (participation of NBB)
High Council of Finance (PB Section) ● budget recommendations for each
government (sub-)entity ● fiscal surveillance ● Chairman + 3 Members from NBB
16
High Council of Finance / PB Section
► Members with five-year renewable mandates ● PB section: 6 members proposed by federal government institutions (among
which, 3 by the NBB), and 6 members proposed by regions and communities ● current Chairman of HCF-PB = Jan Smets, NBB Governor
► Old history but current form / mandate closely linked to devolution process and the European budgetary framework ● ensure that greater spending autonomy does not jeopardise fiscal sustainability ● Monitoring institution as required by the TSCG ● mostly ‘moral authority’, one explicit sanction mechanism (that is never and will
never be used): recommendation to the federal Finance Minister to curtail borrowing by regions/communities
► Public reports but in practice no automatic impact in the budget cycle ● e.g. government does not even have to acknowledge these reports or explain any
deviations from them (situation before the new role, after see below) ● no specific relationship with Parliament
17
High Council of Finance / PB Section – Secretariat
► Currently no own staff, work outsourced to selected staff of the federal Ministry of Finance that form the secretariat and prepare the reports
► Early 2016 governments agreed upon a change of the secretariat ● “Federal” secretariat of the section was enlarged with 6 members who originate
from the budget administrations of the regions and communities but secretariat members are not detached to the HCF-PB
● Federal members of the secretariat, also 6, are to be selected among the staff of the federal Ministry of Finance and the federal Ministry of Budget
► This reform is still in a transitional phase and will probably be revised following the EC report on the implementation of the Fiscal Compact ● The draft amendments envisage a dedicated secretariat for the HCF-PB, which
would only follow the instructions of the HCF-PB chair (EC, 2017)
18
Plan of the talk
1. Intro: the Belgian fiscal landscape
2. Fiscal surveillance for Belgian sub-national governments: – current situation – effectiveness and challenges
3. Concluding thoughts: way forward?
19
Sub-national governments not the key source of fiscal deficits
-6
-5
-4
-3
-2
-1
0
1
2
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Federal government & social security Regions and communities Local government
exceptional deficit for R&C due to ESA 2010 recording of regional PIT
Budget balances by sub-sector (percentages of GDP)
20
Outcome 2015 for the 4 main regions and communities versus structural and nominal objectives
-0.08
-0.06
-0.04
-0.02
0.00
0.02
0.04
0.06
0.08
FlemishCommunity
FrenchCommunity
WalloonRegion
BrusselsCapitalregion
Objective HCF-PB ² own objective ³ outcome
-0.20
-0.15
-0.10
-0.05
0.00
0.05
FlemishCommunity
FrenchCommunity
WalloonRegion
BrusselsCapitalregion
Structural evolution (percentages of GDP)
Nominal budget balances¹ (percentages of GDP)
Sources: illustrative exercise HCF-PB, HCF-PB report, July 2016. 1 Nominal budget balance outcome for the Regions is corrected for the partial registration of the regional PIT in ESA 2010. 2 Indicative nominal budget balance objective derived from the structural balance. 3 Required structural evolution derived from their own nominal budget balance objective.
21
Challenge 1: Budget coordination remains vulnerable... – 1
► No hierarchy between federal government and regions and communities
► No permanent fiscal rules governing regions and communities ● deficit restrictions for local authorities (golden rule type)
► Consensual /contractual approach to fiscal coordination
► Only structural feature = Dec 2013 Cooperation Agreement (between federal government and regions and communities) ● imposes compliance with EU fiscal framework: i.e. convergence to MTO ● essentially a formalisation of the pre-existing procedures ● monitoring role of HCF-PB strengthened = monitoring institution for the TSCG
■ Determination of a significant deviation for each (sub)-entity from the budgetary targets agreed upon in the concertation committee (trigger for the automatic correction mechanism)
● “Belgian feature”: recommendation of specific budget targets for each government (sub-entity) in preparation of the stability programme ■ Recommendation of targets has to be both in nominal and structural terms for each level of
government ■ however: recommendations on the budget targets still need to be “ratified” in the
intergovernment Concertation Committee
22
Challenge 1: Budget coordination remains vulnerable… – 2
► No new specific Cooperation Agreements on budget targets since 2013 ● Regions and Communities only ‘take note’ of stability programme submitted by the
federal government ● Ownership of general government objectives across government levels?
► Result: the HCF-PB section has not been able to perform its monitoring task as foreseen in the Cooperation Agreement of dec 2013 ● The absence of commonly agreed budget targets means there is no legal basis to
determine a significant deviation by each level of government (HCF – PB report, July 2016)
● Evaluation of each level of government purely illustrative for 2015 results
► Difficulties to reach agreements on budgetary targets are (partially) linked to uncertainty following the Sixth Reform of the State ● Such as uncertainty concerning the calculation of the instalments of the regional
tax autonomy and the exact budgetary impact of certain transferred competences
23
… as also reflected by synthetic indicators
Fiscal Rules Indicator for State governments: dimensions reflecting fiscal discipline incentives (standardised, 1 to 10, higher outcomes are more desirable)
0
1
2
3
4
5
6
7
8
Aus
tralia
Aus
tria
Bel
gium
Can
ada
Ger
man
y
Italy
Mex
ico
Spa
in
Sw
itzer
land
Restraining the size of the public sector Ensuring debt sustainability
Source: OECD Fiscal Decentralisation database.
24
Challenge 2: Structural balances for sub-national governements ► Cooperation Agreement of Dec 2013 requires a recommendation for the budgetary
targets of each level of government in both nominal and structural terms ● In line with the EC CAB methodology ● Sum of structural balances of each level of government = structural balance of
the general government ● Recommendation for the general government has to comply with preventive arm European
budgetary framework (minimum structural improvement each year)
► Current approach HCF- PB secretariat: ● General government cyclical component broken down by level of government
■ no determination of an output gap by level of government ■ (OECD / EC) elasticities of specific revenue items applied to regional revenues
● Is this accurate enough to reflect true cyclicality in regional revenues (other tax bases)? ● One-offs by level of government: currently very complicated due to the introduction of
the SR6 and the regional PIT ● Adaptions were made to take into account “Belgian” idiosyncrasies such as the transfers
between the federal state and regions and communities under the Special Finance Act (“linked to economic growth”)
► However: this structural framework is currently not reflected in the regional budget processes (even if they approved 2013 Cooperation Agreement)
25
Challenge 3: HCF – PB: independence?
► Bipartisan / multipartisan composition vs. purely non-partisan institutions in other countries: ● “The appointment process of the chairman, the deputies and the members ...
raises doubts about the High Council’s independence.” (Burret and Schnellenbach, Sachverständigenrat WP 08, 2013)
● “Membership ... carved up between the six traditional political parties” (Coene and Langenus, 2013)
● “The HCF appears to be tightly attached to the Ministry of Finance, which provides logistical resources, budget and staff.” (EC, 2017)
● “… the current legal and institutional framework establishes close interdependencies with the Ministry of Finance and other institutions and governments who nominate the HCF-PB members, thereby weakening the HCF-PB's ability to act as an autonomous entity providing independent, unbiased monitoring.” (EC, 2017)
► Essentially: HCF-PB = Committee of Wise (Wo)Men that is not insensitive to political feasibility constraints ● impact has waned after euro adoption (prior to new role as of 2014, too early to
judge)
► Belgian authorities have committed to (rather vague) ‘amendments’ of the mandate and legal framework
26
Plan of the talk
1. Intro: the Belgian fiscal landscape
2. Fiscal surveillance for Belgian sub-national governments: – current situation – effectiveness and challenges
3. Concluding thoughts: way forward?
27
Concluding thoughts: way forward?
► Challenge 1 – budget coordination ● Ensure that budgetary norms, ownership of stability programmes are not
conditional upon an agreement in the Concertation Committee ● (Further) move away from the ‘contractual’ approach
■ Upgrade the Dec 2013 Cooperation Agreement to a genuine internal Stability Pact ● An explicit ‘no-bail-out’ clause – although sufficient tax autonomy needs to be
ensured ■ May require more systemic reform to state structure (e.g. Communities can not levy
taxes)
► Challenge 2 – structural balances by level of government ● Further research to adapt CAB framework to Belgian and region-specific
elements (look at different tax bases) ● Better adapted framework, more ownership?
► Challenge 3 – independence, HCF PB and secretariat ● Minimum: secure a detached, fully autonomous secretariat under the instructions
of the HCF-PB chair (cf. EC Recommendation) ● But let’s be bold: move from a multi-partisan to a non-partisan institution
(appointment procedures of Members, involvement of foreigners, etc.) ● Examples of other institutions in the IFI Network can provide inspiration…
29
SR6: Reform of the financing of the Communities
► Funding of budget allocations based on distribution keys that generally reflect expenditure needs for specific competences ● a grant based on a distribution key for pupils (15.6 billion euro) ● flat-rate distribution keys will be used for the new competences
child allowance: 0-18 year-olds care for the elderly: over-80s health care: population
► An allocation shared out according to the regional part in federal personal income tax (8.5 billion euro¹)
► Transitional arrangements
1 This is the amount before the contribution to the fiscal consolidation is deducted.
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