Public Finance and National Accounts in the European Context

The euro currency imposes three conditions: price stability, fiscal sustainability, and exchange rate stability. The Stability and Growth Pact (SGP) has created two budgetary limits: 3% of GDP for deficit and 60% for public debt. If a country violates these limits, sanctions can be applied. However, there are two exceptions: economic recession or temporary excessive deficit resulting from extraordinary events. After the 2005 reform (and reinforced by the Fiscal Treaty), the Medium-Term Objective (MTO) was created (usually for a structural deficit of 0.5% of GDP). Recently, there has also been a “relaxation” of the SGP’s rules and targets for contributions to the “Juncker Investment Plan”, and in those countries with a budget deficit below 3%, there has also been a change concerning how the SGP deficit limit of 3% is accounted for, as well as the funding of cofinanced projects, structural reforms, and the cyclic component.

The Juncker Presidency presented a set of proposals for 2018 and 2019 (before the end of its mandate, which is scheduled for July 2019, after the European elections in May 2019) to improve the economic and budgetary surveillance of the Economic and Monetary Union and also to strengthen the competitiveness of the European economies. These proposals also seek to strengthen budgetary surveillance, but above all, they will provide the EMU with the means to correct asymmetries, mitigate the effect of recessions or other events resulting in asymmetric shocks, create mechanisms to support the Member States in financial difficulties, and also support structural reforms.

The Fiscal Compact was introduced to reinforce the objective of the fiscal balance of the National Accounts in the Member States of the European Union. This fiscal balance, obtained through specific rules in line with those approved in the Stability and Growth Pact, enables the preservation of the stability of the euro zone and economic growth. The Treaty uses the Fiscal Compact to establish an objective of a structural fiscal balance corrected from the economic cycle of below −0.5% of GDP. The Fiscal Compact has the purpose of reinforcing the economic pillar from the Economic and Monetary Union, adopting a set of rules which are intended to promote fiscal discipline, to reinforce the coordination of the economic policies, and to improve the governance of the euro zone. Mechanisms of automatic correction are established for those cases where the structural deficit limit or the adjustment path towards the same are jeopardised. However, there is a certain margin of flexibility, depending on the recessive economic cycle or exceptional situations. Those countries subject to an Excessive Deficit Procedure are forced to present an adjustment programme. When the value of public debt exceeds 60% of GDP, the country in question must reduce its public debt ratio to an average rate of one-twentieth per year as a reference pattern. The European Semester establishes the calendar of fiscal planning, namely, the delivery date of the Stability Programme (April) and the national budget for the following year (October). In this way, Member States are permitted to discuss, several times during the year, their economic and budgetary plans with the remaining countries and the various European entities. The Six-pack and the Two-pack reinforce the surveillance of the control of the Excessive Deficit Procedure and the correction of macroeconomic imbalances.

The Macroeconomic Imbalance Procedure has as objectives to detect, a priori, macroeconomic imbalances (preventive arm) and to correct the existing imbalances (corrective arm). It consists of the assessment of a panel of indicators linked with external imbalances, competitiveness, and domestic imbalances. The corrective arm forces the country to be subject to a tighter control and determines the presentation of a plan to correct imbalances.

The National Accounts consist of a set of information based on concepts, definitions, classifications, and statistical/accounting rules whose objective is to provide, for a given time period, a close representation of the economic reality of a given geographic space (country/region). They are the accounting base for the elaboration of the report on the deficits and public debts of the European Union countries, although the application of the National Accounts goes far beyond that of the general government.

The Excessive Deficit Procedure (EDP) consists in the operationalisation of the surveillance present in the Stability and Growth Pact and in the Fiscal Compact. The calculation of the deficit and the public debt, for purposes of the EDP, is carried out in the National Accounts. However, the rules for the calculation of the public debt in the EDP are slightly different from those of the ESA 2010. The opening of an EDP results from the situation of a Member State having violated the deficit limit of 3% of GDP, except in the exceptional circumstances defined in the Stability and Growth Pact (see Chap. 1). Once an EDP has been opened, the country commits to taking measures with the objective of closing the procedure, which can only occur when the fiscal deficit returns to below 3%. The EDP has a preventive arm, and consequently in March and September of each year, all Member States have to communicate their government’s accounts.

The ESA 2010 defined the consolidation perimeter of the government, in other words, the entities (named institutional units) to be considered for the purpose of the calculation of the deficit and the public debt. Under the ESA 2010, a unit that is to be classified as an institutional unit requires two conditions: to have decision autonomy and complete accounting. Decision autonomy is understood to be (1) the right to be the owner of goods and assets and to be able to transact them, (2) to be able to make economic decisions, (3) to be able to contract liabilities, and (4) to be able to elaborate autonomous accounting records. The definition of the sector that belongs to an institutional unit depends, in the first place, on the control of that unit. Control is understood to be (1) able to determine a general policy and (2) able to choose the management board and (3) to hold more that 50% of the capital (which is considered to be sufficient but is not necessary a condition for control). Non-market institutional units are understood to be any institutional unit that does not fulfil the market revenue rule: whereby more than 50% of the total costs are covered by market revenue (revenue by sales at an economically significant price).

Fiscal balance refers to the deficit or surplus in the National Accounts. It provides the net increase/reduction in the public debt (without financial operations). Based on the fiscal balance, it is possible to calculate the primary and the current balance. The difference between revenue and expenditure, which is equivalent to the surplus/deficit, is net lending/net borrowing (B.9).

The recording of operations in the ESA 2010 is carried out using the “accrual” principle (when the expenditure is recorded, that is to say, when the economic value is created/transferred/extinguished, or when the obligation is assumed, changed, or cancelled), except for the case of taxes, where the “adjusted cash” principle is followed. The output is recorded when it is produced, rather than when it is paid for by a purchaser. The sale/purchase of an asset is recorded at the moment when its legal ownership is transferred, rather than at the moment of the respective payment. Interest is accounted for on an accrual basis, rather than when paid. Eurostat only considers as “extraordinary” those expenditures that result from non-controllable events, such as court decisions or natural disasters. The revenues and expenditures from non-repeatable events are considered as “one-off”; however, from a statistic/accounting point of view, these are considered for the calculation of the deficit in the National Accounts.

There are specific rules for the accounting of tax refunds, as well as revenue charged through a tax amnesty, tax credits, and deferred tax assets. The sale of a financial asset (either directly or indirectly) is treated as a financial operation, with no impact on the deficit. The direct sale of a nonfinancial asset has impact on the deficit. In the case of indirect sales, these will only have an impact on the deficit if the selling entity distribute dividends. There are specific rules for revenues from leasing, licences, and concessions, as well as from leaseback operations.

Public expenditure is accounted in accordance with the “accrual” principle. Therefore, transactions are recorded when economic value is created, transformed, or extinguished, or when claims and obligations arise, are transformed, or are cancelled, but not when there is a payment. In the National Accounts, expenditure is classified as follows: expenditure with staff, intermediate consumption, social benefits (in kind or in cash), interest and other current expenditure, or capital expenditure (gross fixed capital formation and other capital expenditure). Expenditure from court decisions with retroactive effects is accounted in the year when the decision is definitive. In the recording of interest from public debt, are accounted the interest that would be paid in the period and not the ones effectively paid. This means that interest are recorded based on the principle of economic specialization (recorded as continuously maturing over time in favour of the creditor based on the amount of the capital in debt). When they are not effectively paid, the increase of capital should be recorded in the financial account as a new acquisition of that type of financial asset.

There are several cases where the general rules for revenues and expenditures may not apply directly. Public-Private Partnerships are “off-balance sheet” according to the risk allocation. The acquisition of military equipment is recorded when delivered. The creation of a guarantee does not originate any recording. If the guarantee is triggered, the value paid by the government is recorded as a capital transfer. Grants received from the European Union are recorded in the National Accounts, according to the principle of fiscal neutrality. Support from the government to the financial sector should consider whether this support should, or not, be recorded as a capital expenditure in the National Accounts or only as financial operations. Dividends from the Central Bank are recorded as capital revenues except for dividends that result from capital gains. The injection of capital by the government in state-owned enterprises may be recorded as a capital transfer or as a financial operation. Operations of securitisation are in general recorded as a financial transaction. In general, the recording of dividends is considered as capital revenue. The cancellation or reduction of debt is, as a rule, recorded as a capital transfer. The transfer of pension funds should be fiscally neutral.