Germany⁴⁰

90. In the run-up to EMU, an intense debate took place in Germany on the design of an ISP, but major differences in needs and economic strength among Länder prevented an agreement. The first contentious issue was the legal form of the ISP. The federal government proposed that the ISP should be enshrined in a federal act, and that decrees would be approved jointly by the federal government and the Länder. While some Länder considered a constitutional amendment or “federal treaty” appropriate, others supported a “case by case” arrangement. Another contentious issue was the distribution of the 3 percent of GDP deficit ceiling of the Maastricht Treaty and/or SGP target between the federal government and social security funds, on the one hand, and Länder and local governments, on the other. The federal government proposed a fifty-fifty distribution. By contrast, the Länder demanded a distribution of sixty-forty in their favor on the grounds that the federal government could absorb unexpected shocks considerably better than the Länder.

91. Concerning the allocation of deficit ceilings within each level of government, the federal government and some Länder supported a distribution based on population size. Many Länder, especially those in the East with large deficits, insisted that the initial situation (existing deficits, per-capita income) be considered. The fourth issue was the distribution of sanctions resulting from excessive deficits. The federal government proposed that sanctions be allocated according to the responsibility of each level of government, while the Länder argued that the German constitution prohibited the imposition of such a heavy financial burden.

Italy⁴¹

92. In 1999 Italy introduced an ISP requiring sub-national governments (regional and local) to reduce their deficits and debt.⁴² The deficit was defined as the difference between total revenues net of state transfers and total expenditures net of investment and interest payments (on a cash basis). The three-year total adjustment was divided among the different levels of sub-national governments (regions, provinces, and municipalities) in proportion to their respective levels of total expenditure. Within each level, fiscal adjustment was allocated in proportion to primary current expenditure in the previous year. Accordingly, even if a government was already running a surplus it had to contribute to the effort. The previously existing ceiling on debt service payments (no higher than 25 percent of own revenues) remained in place. Finally, the ISP established that, if Italy was sanctioned under the Maastricht Treaty, the fines would be levied on the entities that failed to meet their targets, in proportion to the part of the overshoot for which they were responsible. These sanctions were not credible because they could result in excessive penalties for sub-national governments.

93. In 1999 only half of the fiscal consolidation projected in the ISP was achieved. The Pact was therefore modified in late 1999. First, a more ambitious target for 2000 was set for sub-national governments. Second, the definition of the overall balance was changed to include receipts from the sale of real estate assets as part of public revenues. Third, subnational governments meeting the objectives of the ISP would be granted a reduction in the interest on their outstanding debts to the Cassa Depositi e Prestiti.⁴³ The results for 2000 suggest that local governments complied with these revised targets, while the regions breached their deficit ceilings. For 2001, it was established that the targeted balance could not worsen by more than 3 percent relative to its 1999 level.

Spain

94. In 1991, following the publication of the March 1992 Convergence Program (CP) for Spain, the central government and regional governments agreed to the so-called Budget Consolidation Scenarios (BCSs) for the period 1992-1996. These agreement, based on bilateral negotiations, specified the maximum deficit and debt permitted for each region. These programs were made public and became the main tool to coordinate the budgetary and debt policies of the central and regional governments. Though no region complied with the scenarios because of the 1992-1993 recession, they represented a turning point in the evolution of regional debt.⁴⁴ The BCSs were revised in March 1995, following the revision of the CP in July 1994, and were again modified in 1998 with the approval of the first Stability Program. While the former agreements were respected, the deficit and debt levels specified in the last agreement are unknown to the public, and no transparent sanctioning mechanism exists. Therefore, it is impossible to assess compliance.

Austria⁴⁵

95. In 1995 the federal, state (Länder), and local governments reached an agreement in which the different levels of government expressed their willingness to achieve budget balance primarily through expenditure reductions. Subsequently, in 1997, during negotiations on the intergovernmental transfer system, the different levels of government agreed on the maximum deficit that each of them would incur. Under this agreement the federal government was assigned a deficit of 2.7 percent of GDP and the lower levels one of 0.3 percent of GDP.

96. In the 1998 Austrian Stability Pact, all levels of government agreed on an internal allocation of the Maastricht Treaty deficit limit based mainly on population size. In addition, the Pact establishes two coordination committees (one national and one local) to negotiate deficit shares, establish guidelines for the medium-term and monitor and report public finance performance. Moreover, the pact established that the contribution of the federal government and each Land to the sanction payment in the case of an excessive deficit would be proportional to their share of the excess deficit itself. Local governments in one Land collectively share the responsibility for the deficit, and their contribution to sanction payments would be deducted from their share of federal revenues. Länder and local governments would be allowed to assign part of their permissible deficit to other entities. No sanctions were established for non-compliance with the deficit ceiling. The deficit shares are to be negotiated together with the intergovernmental transfer agreement between the federal and the sub-national governments for a period of four years. The agreement currently being negotiated would include sanctions for non-compliance.

Belgium⁴⁶

97. In Belgium the general government consists of two bodies: the so-called Entity I, which includes the federal government and the social security system, and the Entity II, which includes communities, regions, and local governments. There exist three communities (the Flemish, the French, and the German-speaking community) and three regions (the Flemish, the Walloon and the Brussels-Capital region), referred to as the federated entities. Communities and regions are financially autonomous and are financed mainly through shared taxes, which are centrally collected and then allocated among the different levels of government according to parameters fixed by law. In addition, communities and regions can impose their own taxes and issue debt. Local governments are financed through regional grants and local taxes.

98. In 1994 a first agreement of cooperation between the federal government and the communities and regions was reached. Subsequently, other intergovernmental agreements were reached for the period 1996–99, in 1999 for the period 1999–2002, and in 2000 for the period 2001–2005. These agreements established permissible deficit levels for Entity I and Entity II. The targets were set according to the recommendations of the High Council of Finance, which is also in charge of monitoring and reporting on compliance.⁴⁷ The cooperation agreement does not include formal sanctioning procedures in case of deviation from the permissible deficits. However, the federal government can restrict the borrowing capacity of communities and regions for a period of up to two years upon recommendation of the High Council of Finance and after the regions involved have being consulted. Until now, this mechanism has never been invoked.