The Italian Budget Cycle

Budget cycle

September 2013

The preventive arm of the EU

The economic and financial crisis has led to the adoption of European rules to ensure greater economic policy coordination amongst EU Member States.

The European Semester: introduced in 2011, the Semester is not a procedure to approve national budgets, but a mechanism to reinforce EU surveillance of the fiscal and macro-economic trends in Member States by means of a preventive discussion on budgetary policies.

Changes in the EU regulatory framework led to modifications in national accounting discipline currently defined by Law n. 196/2009 on Public Finance and Accounting, and later modified by Law n. 39/2011.   

But first… how does the European Semester work?

January

March

April

June July

Following months

The European Commission presents its Annual Growth Survey in which it formulates strategic proposals.

The European Council indicates the economic policy objectives and reform strategies based on a Report drafted by the Commission.

The Member States inform the Commission of the objectives, priorities and plans they intend to adopt in their updated Stability and Reform Programmes.

The Commission drafts country-specific recommendations which are reviewed by the Ecofin Council (Ministers of Finance) and the European Council (Heads of State and Government) before final endorsement by the latter.

Based on these recommendations the Member States draft their budgets and economic policy measures.

Economic planning in Italy

The economic planning cycle begins in April with the presentation of the Multiannual Financial Framework - MFF (Documento di Economia e Finanza - DEF). The MFF is the three-year economic and financial planning tool, divided into three areas:

1. Stability Programme (Programma di Stabilità - PS): economic policy objectives, macro-economic aggregates and public finance targets set year by year.

2. Public finance analysis and trends:  analysis of the income statement and cashflow of Public Administrations, divided by subsectors.

3. National Reform Programme (Piano Nazionale di Riforma - PNR): progress report about the enacted reforms, macro-economic factors impacting competitiveness, main reforms to be enacted, and foreseeable effects of the reforms on growth, competitiveness and employment.

In September the Government presents Parliament an

Update of the Economic and Financial Document

which includes:   possible updating of the macro-economic and public finance

forecast for the three-year reference period and possible adjustment pursuant to the European Council recommendations;

  possible updating of the programmed targets;

  contents of the internal Stability Pact obliging Regions and Local Authorities to pursue public finance targets by establishing individual programmatic targets.

… update

Before October 15 the Government presents Parliament with the Stability Bill and the Budget Bill which are part of the three-year Public Finance Manoeuvre.

The Stability Law only contains provisions with financial effects in the three-year reference period.

The law cannot contain:

delegation provisions, nor provisions of organisational, localistic or microsectoral nature.

The Budget indicates expenditure and revenue for the following year based on current legislation.

Public Finance Manoeuvre

  The legislative process of the Stability Bill

“Blocked” Parliament

“Limited” amendments

When the Stability Bill is being passed through Parliament the daily agenda of the Commissions and Assembly cannot include any Bills involving variations in expenditure or revenue, or Bills intended to modify current legislation regarding the general accounting of the State.

Amendments introducing provisions with no financial effects are not admissible, nor are delegation provisions or of an organisational, localistic or microsectoral nature, or regarding the general accounting of the State.

  The Government writes but Europe…

Beginning with the Budget Cycle 2014, the EU Regulations contained in the “Two Pack” further reduce the margins of discretion of Member States as regards fiscal policy.

In practice:

  the Budget Bills are subject to preventive review by the European Commission;

  the Commission expresses an opinion and may ask the Member State to modify the budget should it be incompatible with the parameters of the Stability Pact;

  the next Stability Bill will be examined, in parallel, by the Italian Parliament and the European Commission.

Approval of the Stability Bill

When the Stability Bill is approved, so is the Budget Update which takes into account the variations in financial aggregates introduced by the Stability Bill.

Peremptory time limit for approval

Parliament has until 31 December to examine and amend it. Beyond that date, there is a…

provisional budget:

Parliament authorises the Government to implement the still unapproved draft budget, in other words the Government may collect revenue and pay expenditure according to provisions in the budget (for a maximum of four months).

Institutions in the Eurozone reacted to the sovereign debt tensions by further reducing the margin of discretion of Member States in the field of fiscal policy.

Italy approved the reform of Article 81 of the Constitution: the principle of the so-called obligation for a structural budget balance, in other words the structural balance (corrected for the economic cycle) between revenue and expenditure, becomes part of the Constitution.

What does this entail?

Starting in 2014, the deficit adjusted to take into account the effects of the economic cycle should aim to be zero. Structural debt will be permitted only in exceptional cases after authorisation by an absolute majority of the members of the Lower House and Senate.

Hands tied (by the EU) after the introduction of the balanced budget rule

Budgetary policies will also be subject to a “post” budget approval review implemented through surveillance of the deficit and public debt.

Main tool:

Excessive Deficit Procedure (if the deficit exceeds 3% of GDP). Assessment is performed by the European Commission; the European Council will then decide whether or not to initiate infringement proceedings for excessive deficit. Should the Council decide to proceed, it will recommend the Member State to reduce the deficit to less than 3% within a certain timeframe. The Council can decide to apply sanctions or fines and ask the European Investment Bank (EIB) to reconsider its lending policy towards the Member State in question. .   

The corrective arm of the EU