This Focus (in Italian) examines the recent Constitutional Court ruling no. 247/2017 concerning the legitimacy of the current formulation of the balanced-budget rule for local authorities with particular reference to the failure to include surpluses in the balance to which the balanced-budget rule applies.
The Court, affirming the principle that “the final balance of administrative operations is an integral, indeed necessary, part of the determination of the concept of budgetary balance”, stressed the need to ensure the full availability of surpluses to local authorities that generate them, once this surplus is definitively ascertained in the final accounts. According to the Court, limitations to such availability would therefore only be admissible on a temporary basis (for example, with reference to the budget, which is prepared before the final accounts for the previous year).
In the recent circular 5/2018, the Department of the State Accountant General (RGS), while referring to the ruling of the Court, confirmed that use of surpluses is limited to resources that become available within the scope of budget balance, possibly increased with existing flexibility instruments (regional agreements and national solidarity pacts and derogations from the budget-balance rule). These uses are considered to be in accordance with the Court’s interpretative guidelines and in any case suitable for gradual elimination of the surpluses themselves. Apparently, therefore, the ruling in question would have no operational consequences on how local authorities can use surpluses available for compliance with the budget-balance rule.
The Focus first addresses developments in the budget rules for local authorities, which, for the purposes of controlling the public finances, attempted the difficult task of coordinating between accounting rules and the criteria underlying European constraints.
A quantitative analysis of surpluses underscores the amount of potentially spendable resources in the case of inclusion in the balance for which budget balance is sought. The data, provided by the RGS for 2016, are partial (limited to 14 regions, 81 provinces, 11 metropolitan areas and 6,559 municipalities) but identify available surpluses, those directly affected by the ruling, of more than €5.3 billion. They are concentrated in the budgets of local authorities, being less significant for the regions, with a decreasing distribution from the North to the South of the country. However, the surplus of the local authorities also includes items not addressed by the Court’s ruling. More specifically, these include surpluses deriving from restricted-use transfers and those allocated for investments but not committed, in the amount of €7.4 billion and €3.5 billion respectively. These amounts are mainly allocated in the budgets of the regions, provinces and metropolitan areas, while they have less impact on the budgets of municipalities.
In light of the magnitude of the amounts potentially involved and the consequent risks for the public finances, it would be helpful for the future to identify and remove the causes that give rise to the progressive accumulation of unspent resources and the consequent need to manage their reduction.
Until recent years, certain conduct on the part of government administrators facilitated the accumulation of surpluses. One example is the legislative practice of agreeing with the regions to run a surplus for the purpose of defining their contribution to the budget package, or the administrative practice of disbursing transfers at the end of the year, consequently hindering the accurate quantification and programming of available resources as well as their full use. Eliminating such practices would partially remove, as requested by the Court, the lack of transparency and excessive accounting technicalities that compromise the legibility of the accounts of local authorities and the public finance packages that impact them.
Finally, the ruling also addresses the need for a reconsideration of the so-called dual track of rules for local authorities: that determined by the budget-balance requirement and that created by accounting regulations. Eliminating the current structure would have significant implications for the principles of coordination of the public finances. It would imply a change in the current approach in which the State is the actor who exercises coordination, including through its regulation of the use of the budget resources of other entities. The full availability of surpluses (once definitively ascertained) by local authorities would imply – with regard to compliance with general government balances – that the State would offset (and be in a position to do so) any mismatches of revenue and expenditure on an accruals basis that the unrestricted use of surpluses by local governments could entail.
The transition would also seem to require certain conditions to ensure that surpluses are not merely figments of accounting rules: a) completion of the implementation of the accounting system delineated by Legislative Decree 118/2011 (for example, with full provisioning of the allowance for doubtful accounts, which is already planned to take effect for 2021) to ensure the effectiveness of mechanisms for the orderly management of the budget; b) a transparent process for identifying debtor positions in respect of companies with public investors and third parties; and c) compliance with the payment terms of suppliers. The transition should be gradual in order to enable the progressive reduction of existing surpluses.
Text of document (in Italian)