EUROPEAN COMMISSION Brussels, 5.2.2020 SWD(2020) 211 final COMMISSION STAFF WORKING DOCUMENT Review of the suitability of the Council Directive 2011/85/EU on requirements for budgetary frameworks of the Member States Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Economic governance review















Report on the application of Regulations (EU) No 1173/2011, 1174/2011, 1175/2011, 1176/2011, 1177/2011, 472/2013 and 473/2013 and on the suitability of Council Directive 2011/85/EU {COM(2020) 55 final} - {SWD(2020) 210 final}



COMMISSION STAFF WORKING DOCUMENT Review of the suitability of the Council Directive 2011/85/EU on requirements for budgetary frameworks of the Member States Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Economic governance review Report on the application of Regulations (EU) No 1173/2011, 1174/2011, 1175/2011, 1176/2011, 1177/2011, 472/2013 and 473/2013 and Council Directive 2011/85/EU



Contents 1.Introduction 2.Directive 2011/85 – context, rationale and main elements 3.Main developments in the areas covered by Directive 2011/85 3.1. Statistics and transparency 3.1.1. General considerations 3.1.2. Main developments 3.1.3. Conclusions 3.2. Forecasts 3.2.1. General considerations 3.2.2. Main developments

3.2.3. Conclusions 3.3. Numerical fiscal rules 3.3.1. General considerations 3.3.2. Main developments 3.3.3. Effectiveness of NFRs in meeting the objectives of Directive 2011/85 3.3.4. Conclusions 3.4. Medium-term budgetary frameworks 3.4.1. General considerations 3.4.2. Main developments 3.4.3. Effectiveness of MTBF 3.4.4. Conclusions 3.5. Coordination mechanisms across sub-sectors of general government 3.5.1. General considerations 3.5.2. Main developments 3.5.3. Conclusions 4.Overall assessment and conclusions 5.Annex: Stakeholders survey

1.Introduction Directive 2011/85/EU on requirements for national budgetary frameworks of the Member States was adopted in November 2011. It was part of a package of legislative initiatives (the ‘six-pack’) presented by the Commission in response to the worldwide economic and financial crisis. It was the first piece of EU legislation setting EU-level minimum requirements for national budgetary frameworks. Directive 2011/85 contains requirements concerning the main elements of national budgetary frameworks, namely with respect to: ·systems of budgetary accounting and statistical reporting; ·rules and procedures governing the preparation of forecasts for budgetary planning; ·country-specific numerical fiscal rules; ·medium-term budgetary frameworks; ·transparency of public finances and mechanisms that regulate fiscal relationships between public authorities across sub-sectors of general government. This staff working document accompanies the Commission Communication on the economic governance review. Article 16 of Directive 2011/85 requires the Commission to publish a ‘review of [its] suitability’. The Commission has carried out that review in the context of a general review of EU economic governance. This staff working document supports the review of Directive 2011/85, given the specific nature of the review clause in Article 16 (see Box 1). It contains background analysis and technical information supporting and supplementing the Commission’s views presented in its Communication. Box 1. Council Directive on requirements for budgetary frameworks of the Member States Article 16 1. By 14 December 2018 the Commission shall publish a review of the suitability of this Directive. 2. The review shall assess, inter alia, the suitability of: (a) the statistical requirements for all sub-sectors of government; (b) the design and effectiveness of numerical fiscal rules in the Member States; (c) the general level of transparency of public finances in the Member States. […] The review clause in Article 16 determines the nature and content of the review: ·it envisages a one-off review of suitability. As Directive 2011/85 was the first EU’s legislative initiative setting out requirements for national budgetary frameworks, the purpose of the review is to inform the legislator whether that EU intervention has delivered on its objectives and whether it has been ‘suitable’. Therefore, the staff working document reviews experience with Directive 2011/85 so far, notably in terms of its transposition into the Member States’ legal order and implementation of its requirements in practice. The primary focus of the analysis is on the period since its entry into force on 13 December 2011; ·the requirement to assess the ‘suitability’ of Directive 2011/85 is relatively open. It is not, however, a weakness of the review clause. On the contrary, because Directive 2011/85 covers a wide and varied range of issues, the broad wording of the clause means that the assessment approach can be tailored to each of the areas in the most appropriate way; ·Article 16 emphasises several areas of Directive 2011/85 (see Box 1), but does not restrict the review to them (note the use of ‘inter alia’). The Commission’s review therefore covers the whole Directive, given the interlinkages between its various parts. The analysis and conclusions set out below take account of the fact that Directive 2011/85 was the first but not the only legislative initiative in the area of national budgetary frameworks. Other initiatives have also had profound impacts on Member States’ actions in this area. Therefore, identifying its impact, as opposed to that of the other EU and EU-level instruments, is in general challenging and often involves a large degree of judgment. For that reason, the Commission is undertaking a comprehensive and holistic assessment of the EU fiscal framework and the legislation concerning national fiscal frameworks in this and related documents. The subsequent sections will return to that issue in more specific terms when discussing the individual parts of Directive 2011/85. This staff working document has been prepared using information collected through multiple processes and channels. It includes information gathered for the purposes of checking compliance with Directive 2011/85. In addition, the Commission services regularly collect information on the design and functioning of national fiscal frameworks and make it available in a structured manner in the Fiscal Governance Database maintained by the Commission’s Directorate General for Economic and Financial Affairs. Unless otherwise noted, the cut-off date for information taken into account for the analysis is December 2019. The analysis presented here has been greatly enhanced by a wide survey of Member State practitioners involved in the implementation of Directive 2011/85. Specifically, the survey involved the Member States’ ministries of finance (as the main ‘operators’ affected by Directive 2011/85), statistical offices and independent fiscal institutions (IFI). The document reflects views of the surveyed experts throughout the text, with more details presented in the Annex. The structure of this staff working document broadly follows the structure of Directive 2011/85. Section 2 provides background information about the Directive itself – it recalls the history of its adoption, its objectives and the specific tools provided to achieve them. Section 3 contains the main analysis organised in sub-sections corresponding to the building blocks of Directive 2011/85. All the sub-sections have a similar structure, first setting out the Directive’s provisions and their rationale, followed by a description and analysis of key developments in the area concerned in terms of national transposition and implementation. Two of the sub-sections, namely those on the numerical fiscal rules and the medium-term budgetary frameworks, include additional analysis looking into the effectiveness of those fiscal devices in the light of the Directive’s provisions. Finally, Section 4 summarises and concludes the overall analysis. 2.Directive 2011/85 – context, rationale and main elements

Directive 2011/85 was part of the EU’s attempt to improve its economic governance as a response to the crisis. While the global economic and financial crisis originated elsewhere, the EU was profoundly affected. The economic and financial shock exposed weaknesses in Member States’ economies and put into question the effectiveness of the EU’s economic surveillance. While the sources of those weaknesses were very diverse and not necessarily fiscal in nature, the crisis led to a sudden and dramatic deterioration of fiscal accounts. This was primarily due to the sharp economic downturn, but also to the insufficient reduction of debt before the crisis. The rapidly deteriorating fiscal positions, in some Member States in particular, undermined financial market confidence, leading to a sharp increase in government bond yields. Financing costs reached unsustainable levels in several Member States and required EU and international financial assistance. As a response to those developments and to address the shortcomings in pre-crisis economic surveillance, the Commission sought to strengthen and broaden economic policy coordination. In September 2010, the Commission published a package of legislative proposals (the ‘six-pack’), which strengthened the Stability and Growth Pact (SGP) and extend EU surveillance to macroeconomic imbalances. The package also contained a proposal for a Council Directive on requirements for budgetary frameworks of the Member States. The imperative of strengthening Member States’ fiscal governance rested on a vast body of economic literature illustrating the benefits of fiscal frameworks for conducting sound fiscal policies. Strong rule-based domestic frameworks support fiscal responsibility with a view to attaining sound budgetary positions, in particular by containing the deficit bias, and to reducing the pro-cyclicality of fiscal policy choices (European Commission, 2010). Institutional settings at national level can play an important role in reining in spending and deficit biases; they include in particular: (I)the procedural rules of the budgetary process; (II)the numerical fiscal rules guiding or constraining policy-makers’ discretion; and (III)independent fiscal bodies or institutions in charge of providing inputs (e.g. forecast, analysis) and formulating recommendations in the area of fiscal policy (European Commission, 2006). While some research shows that fiscal rules have sustained fiscal discipline in a significant number of countries (Guichard et al., 2007), other papers emphasise the importance of well-designed budgetary procedures in ensuring the centralisation of the budget formulation (von Hagen et al., 2002). Other contributions analyse the effect of specific characteristics of fiscal frameworks on budgetary performance. For example, countries implementing stronger rules over a larger share of general government finances were found to register better budgetary outcomes (Debrun et al., 2008), whilst effective medium-term budgetary planning appears instrumental in sticking to budgetary plans (European Commission, 2007). The quality of domestic budgetary procedures was also shown to contribute to better budgetary performance (Fabrizio and Mody, 2006). While the crisis was the immediate trigger for the proposal for Directive 2011/85, the focus on the national fiscal frameworks in Member States, on their role and importance had been steadily growing long before its adoption. First, given that the Treaty defines Member States’ budgetary obligations in terms of the general government sector, Protocol No 12 on the excessive deficit procedure (EDP) annexed to the Treaties requires Member States to ‘ensure that national procedures in the budgetary area enable them to meet their obligations in this area deriving from these Treaties’. Further, in the context of the first reform of the SGP in March 2005, the Council highlighted the importance of national budgetary frameworks in its report to the European Council on ‘Improving the implementation of the Stability and Growth Pact’. The Council stressed the need for complementarity between the national frameworks and EU fiscal rules. In the Council’s view, national rules should complement the Member States’ commitments under the SGP and national governance arrangements should complement the EU framework. The Council considered that national institutions should play a more prominent role in budgetary surveillance to strengthen ownership, enhance enforcement through national public opinion and complement the economic and policy analysis at EU level. Discussions on the role and desirable features of national fiscal frameworks continued along the ECOFIN filière within the Council. In May 2010, shortly before the publication of the draft Directive, the Council adopted Conclusions on domestic fiscal frameworks. The Council stressed the importance of resilient and effective fiscal frameworks for the implementation of the SGP and for the sustainability of public finances. While recognising the need for fiscal governance to take account of country-specific circumstances, it identified some desirable common features of resilient and effective fiscal frameworks and encouraged the Member States to enhance their fiscal governance arrangements. Among those features, the Council underlined the importance of comprehensive nature of fiscal frameworks and of strong national ownership. The Council also invited the Member States to strengthen their coordination arrangements across the levels of administration and to improve budgetary procedures. Fiscal rules, enforcement mechanisms and independent fiscal institutions were the elements that significantly contributed to the effectiveness of fiscal frameworks, as illustrated by successful country experiences. Therefore, Directive 2011/85 should be seen as a further development of previous policy discussion on the design and role of national fiscal frameworks in the EU. The severity of the crisis showed that it was no longer sufficient to rely on voluntary exchange of best practices and a more binding approach to national fiscal frameworks was necessary. Directive 2011/85 therefore set minimum requirements for Member States’ national fiscal frameworks to ensure that they support compliance with budgetary obligations under EU law. Directive 2011/85 (recital 1) aimed in particular to specify the obligations of national authorities to comply with the provisions of Protocol No 12. That objective justifies the legal base of the Directive, which is the third subparagraph of Article 126(14) of the Treaty on the Functioning of the European Union (TFEU). It allows the Council ‘on a proposal from the Commission and after consulting the European Parliament, lay down detailed rules and definitions for the application of the provisions of the said Protocol’. The objective of achieving ‘uniform compliance with budgetary discipline as required by the TFEU’ (recital 28) was important to avoid situations in which a lack of fiscal prudence in a very small subset of Member States creates significant negative spillovers. The experience of the crisis also highlighted that EU budgetary requirements were not sufficiently internalised in fiscal policy-making at national level or at least not to the same extent in all Member States. Therefore, coordinated strengthening of fiscal frameworks, in line with the Directive’s minimum requirements were also meant to contribute to enhancing national ownership of EU budgetary obligations in every Member State. Enhancing policy transparency was an important element of the economic governance reform of 2010 in general and of Directive 2011/85 in particular. Specifically, the European Semester of economic policy coordination shifted the focus of multilateral surveillance at EU level from ex-post information on policy decisions to ex-ante discussion of their policy plans. The discussion on policy intentions among the Member States was intended to provide peer support to avoid policy mistakes. In the same vein, Directive 2011/85 created requirements for enhanced fiscal transparency at national level in terms of statistical data, forecasting methodologies, medium-term policy objectives and the transparency of the whole general government sector. Directive 2011/85 has seven chapters. Chapter I lays down the purpose of the Directive and defines key terms. In particular, it defines the (national) budgetary framework as ‘the set of arrangements, procedures, rules and institutions that underlie the conduct of budgetary policies of the general government’, comprising the following main elements: a)systems of budgetary accounting and statistical reporting; b)rules and procedures governing the preparation of forecasts for budgetary planning; c)country-specific numerical fiscal rules, which contribute to the consistency of Member States’ conduct of fiscal policy with their respective obligations under the TFEU, expressed in terms of a summary indicator of budgetary performance, such as the government budget deficit, borrowing, debt, or a major component thereof; d)budgetary procedures comprising procedural rules to underpin the budget process at all stages; e)medium-term budgetary frameworks as a specific set of national budgetary procedures that extend the horizon for fiscal policy-making beyond the annual budgetary calendar, including the setting of policy priorities and of medium- term budgetary objectives; f)arrangements for independent monitoring and analysis, to enhance the transparency of elements of the budget process; g)mechanisms and rules that regulate fiscal relationships between public authorities across sub-sectors of general government.

For those elements, Directive 2011/85 specifies a number of essential standards, grouped in subsequent chapters. Chapter II contains provisions on public accounting and statistics, in particular the availability of fiscal data. Chapter III lays down requirements for forecasts underlying fiscal planning. The provisions of Chapter IV require Member States to have in place numerical fiscal rules and set out their specifications. Chapter V covers medium-term budgetary frameworks, their elements and characteristics. Chapter VI concerns the transparency of general government finances and the comprehensive scope of budgetary frameworks, and Chapter VII contains final provisions, including the review clause. Directive 2011/85 entered into force in December 2011, with the Member States obliged to bring into force the provisions necessary to comply with it by 31 December 2013. After the adoption of Directive 2011/85, discussions on strengthening national fiscal frameworks continued, leading to further EU and intergovernmental initiatives. First, the Treaty on Stability, Coordination and Governance in the EMU (TSCG), an international treaty signed in March 2012, requires its signatories to introduce in the national legal order a structural budget-balance rule equipped with a correction mechanism and to set up a national independent institution to monitor its operation. Those provisions, which were part of the so-called ‘Fiscal Compact’ (Title III of the TSCG), apply to euro-area Member States and other Member States that declare a willingness to be bound by them (to date Bulgaria, Denmark and Romania) . Second, Regulation No 473/2013 (part of the ‘two-pack’) introduced more specific requirements for the euro-area Member States on the monitoring of national fiscal rules by independent fiscal institutions, the use of independently produced or endorsed macroeconomic forecasts in budgeting, and on a common domestic budgetary timeline. An interim report took preliminary stock of the transposition of Directive 2011/85 at the end of 2012, i.e. well before the transposition deadline. In line with Article 15(3) of Directive 2011/85, the Commission submitted to the European Parliament and the Council the ‘Interim Progress Report’ on the implementation of Directive 2011/85 to inform the Parliament, the Council and the public on the progress with its transposition . The report, primarily based on information reported by the Member States, noted at the time substantial, but uneven progress. Since the expiry of the transposition deadline at the end of 2013, the Commission has assessed compliance in accordance with the applicable EU procedures. To conclude, the aim of Directive 2011/85 was to pioneer the strengthening of Member States’ budgetary frameworks in the wake of the crisis, which then received additional impetus from other EU and intergovernmental drivers. Directive 2011/85 remains the first and the most wide-ranging EU policy intervention with respect to specific requirements for national budgetary frameworks. It is also the only legal instrument in that field addressed to all Member States, as Regulation No 473/2013 applies to euro-area Member States only. Nevertheless, its action and effectiveness have to be seen as part of a broader set of complementary and mutually reinforcing EU-level initiatives on fiscal governance. 3.Main developments in the areas covered by Directive 2011/85 This section is organised in sub-sections corresponding to the building blocks of the Directive. Each sub-section first sets out the provisions of Directive 2011/85 and explains their rationale. The section follows with a description and analysis of key developments in terms of national transposition and implementation. The sub‑sections on the numerical fiscal rules and medium-term budgetary frameworks include additional analysis looking into the effectiveness of these fiscal arrangements in the light of the Directive’s provisions. 3.1.Statistics and transparency 3.1.1.General considerations The sovereign debt crisis highlighted a number of lessons as regards statistics and transparency. In the run-up to the crisis, government deficit and debt ratios increased rapidly in a number of Member States, partly due to the materialisation of implicit and contingent liabilities stemming from the financial sector, triggered by the economic downturn. In some cases, these increases only became apparent with the publication of annual data. These developments coincided with the revelation of the true scale of Greece’s government deficit. A number of conclusions were drawn from these events; in particular: ·it may not be sufficient to focus attention only on fiscal-surveillance-relevant deficit and debt ratios, as reported to Eurostat in the context of the Excessive Deficit Procedure (EDP) statistics (where data become available with a lag), to understand underlying fiscal trends or take account of hidden liabilities; ·to ensure fiscal discipline, Member States’ budgetary frameworks need to cover domestic public finances comprehensively, which requires inter alia planning and reporting systems that ensure comprehensive and consistent coverage of all sub‑sectors of general government; and ·concentrating control mechanisms solely on outturn data, as reported to Eurostat, may not suffice, so appropriate safeguards are needed to ensure the quality and reliability of input data. Directive 2011/85 aimed to fill those gaps by addressing areas not directly covered by EU requirements at the time. Specifically, it laid down requirements on public accounting, high-frequency fiscal data and the transparency of general government finances (in particular as regards extra-budgetary units and funds, contingent liabilities and tax expenditures). Directive 2011/85 targets having in place public accounting systems that cover comprehensively and consistently all sub-sectors of general government and are subject to internal control and independent audits; the benefits of such systems go beyond statistics. The provisions of Directive 2011/85 in that area are two-fold: ·they clearly link public accounting requirements to ensuring the quality of ESA/EDP data, which are crucial for the proper functioning of the EU’s fiscal surveillance framework, by stressing the need for comprehensive and consistent reporting systems covering all sub-sectors of general government; and ·Directive 2011/85 recognises the specific value of public accounting systems beyond producing statistical data, inter alia by referencing the main international standard in this area and by stating that public accounting systems include elements such as bookkeeping, internal control, financial reporting, and auditing, which are distinct from statistical data. As timely budgetary monitoring necessitates the availability of comprehensive high‑frequency data shortly after the end of the reporting period, Directive 2011/85 requires that such data be published for all sub-sectors of general government. The main objective here was to enhance timely budgetary monitoring and to avoid the late detection of significant budgetary errors (see recital 7). To this end, Directive 2011/85 introduced an obligation to publish, with a short lag, cash-based (or equivalent) data on which the subsequent ESA/EDP reporting is based, along with methodological explanations of how the data are used to produce statistics according to ESA standard in the form of a detailed reconciliation table. The particular focus of Directive 2011/85 was to ensure that data are published for all sub-sectors of general government, as defined in the ESA, and not only for the units covered by regular budgets and therefore subject to monitoring by the budgetary authorities. The reporting requirements in Directive 2011/85 aim to strike the right balance between the timeliness and the comprehensiveness of the data. EU budgetary surveillance is based on fiscal data compiled in line with the requirements in ESA 2010, which is an EU Regulation determining very precisely the content and format of the data. By contrast, national budgetary reporting is based on national traditions and principles, and may therefore differ significantly from ESA-based data, in particular as regards: ·the perimeter of general government sector, where national accounts are based on economic substance rather than legal form, therefore usually capturing some of the extra-budgetary units and corporations not covered by national budgets; and ·the time of recording and accounting basis – while ESA 2010 recording is accruals‑based (i.e. it captures the moment of underlying activity), national budgetary reporting is predominantly linked to the timing of cash payments or appropriations.

However, the main advantage of the national budgetary reporting lies in its timeliness. Directive 2011/85 combines these two aspects, requiring monthly publication (quarterly for local government) that is aligned with ESA requirements only in terms of the general government perimeter, while providing an improved timeliness. In addition to high‑frequency data based on national approaches, Article 4(7) of Directive 2011/85 also mandated Eurostat to publish quarterly deficit and debt data every three months. A dedicated statistical task force further specified the requirements in Directive 2011/85 for national cash-based (or equivalent) data publication. The objective was to assist Member States with the practicalities of complying with Directive 2011/85 as regards reporting fiscal data. The task force was led by the Commission (Eurostat in cooperation with the Directorate-General for Economic and Financial Affairs) and was composed of experts in the area of budgetary statistics. It produced a report that was endorsed by the Economic and Financial Committee in February 2013. Without altering the minimum requirements of Directive 2011/85, the report advocated the publication of more detailed breakdowns on the basis of an indicative split by economic categories (e.g. types of tax and major expenditure groups). With respect to the reconciliation table required by Article 3(2), the task force clarified that it should enable non-statisticians to understand better the conceptual differences and the transition between the monthly data used for national policy purposes and ESA data used for national accounts. Directive 2011/85 requires the publication of information on extra-budgetary bodies and funds, which is needed to ensure better fiscal planning and strengthen democratic control over public finances. As explained above with respect to high‑frequency data, in most cases the general government perimeter for ESA/EDP purposes is broader than the perimeter of institutions covered by national budgets. This is because national accounts classify units according to their economic substance rather than formal criteria; over the years, the EU statistical system has developed a comprehensive set of criteria that help to establish the nature of units and of their operations. In order to reduce the chances of ex post ‘negative surprises’, Directive 2011/85 also addressed the issue of units classified under general government for the purposes of national accounts, but not covered by regular budgets at sub-sector level. The operations and liabilities of such units affect ESA/EDP deficit and debt outcomes, but they will not necessarily be included at the planning stage, thus creating a risk of deficit and debt overruns vis-à-vis targets in medium-term or annual budgetary documentation. Moreover, a lack of transparency with respect to such units limits the ability of parliaments and the public to exercise effective oversight of public sector policies when they go beyond formal budgetary provisions. Accordingly, Directive 2011/85 introduced an obligation to present the combined impact of extra-budgetary units and funds on general government balances and debt in the framework of annual budgetary processes and medium-term budgetary plans. Directive 2011/85 emphasised the importance of publishing information on contingent liabilities and laid down specific requirements in that respect. Contingent liabilities are potential liabilities that could become actual government liabilities if specific conditions prevail. The timely availability of comprehensive information on them helps policy-makers understand and possibly mitigate the extent of risks associated with the build‑up of governments’ explicit and implicit obligations. Since the materialisation of such obligations as government deficit and debt is contingent on uncertain future events, they are not recorded in core national accounts and do not affect government deficit and debt. The probability of their materialisation is low in good economic times, but likely to increase in the downturn phase. As with extra-budgetary general government units, accessing information on the extent of such liabilities is partly a matter of ensuring the ability of parliaments and the public to exercise effective oversight of all public sector policies, not only of items formally covered by budgets. Accordingly, Directive 2011/85 introduced some requirements in this area, which the task force developed at technical level. This resulted in: ·common definitions in terms of national accounts, so that comparable data are compiled across Member States; and ·agreement that information on contingent liabilities should be submitted annually to Eurostat, which publishes the data in its database. The Directive requires Member States to publish information on tax expenditures, which helps to improve fiscal planning and inform the public debate. Tax expenditures may have a significant impact on the economy and public finances. Timely and detailed data on the expected impact of existing and planned tax expenditures not only make it much easier to identify areas in which the current tax system could be improved, but also improve annual and medium-term fiscal planning. Consequently, it was felt appropriate to include in the Directive a requirement to publish detailed information on the impact of tax expenditures on revenues. However, unlike other provisions covered in this section, that general requirement was not further specified by means of a detailed template, although the Commission did issue a guidance note that provided Member States with recommendations as regards the coverage and level of detail of the tax expenditure information. 3.1.2.Main developments The analysis below gives an overview of the transposition and implementation, and other developments relating to the statistics, accounting and transparency provisions of Directive 2011/85. Public accounting Directive 2011/85 underlines the need for comprehensive and consistent reporting systems that are subject to internal control and independent audits. In particular, Article 3(1) provides that ‘Member States shall have in place public accounting systems comprehensively and consistently covering all sub-sectors of general government and containing the information needed to generate accrual data with a view to preparing data based on the ESA standard. Those public accounting systems shall be subject to internal control and independent audits’. The consistency and comprehensiveness of such systems is also stressed in the second part of Article 12, which requires the ‘consistency of accounting rules and procedures, and the integrity of their underlying data collection and processing systems’. Given the need for a benchmark for assessing the consistency and comprehensiveness of public accounting systems, Article 16(3) tasked the Commission with assessing the suitability of the International Public Sector Accounting Standards (IPSASs) for the Member States. The credibility of EU budgetary surveillance hinges crucially on reliable budgetary and financial reporting, which explains why so much effort has been made in this area. Given the importance of ESA/EDP statistics for the proper functioning of the EU fiscal framework, the public accounting provisions in Directive 2011/85 are explicitly linked to the ability to generate accrual data with a view to preparing data based on the ESA/EDP standard. EDP statistics were well regulated even before the crisis and other legal acts affecting their production were adopted at around the same time as Directive 2011/85, in particular: ·Regulation (EU) No 679/2010 amending Regulation (EC) No 479/2009 as regards the quality of statistical data in the context of the EDP, which entitled Eurostat, in the context of methodological visits to Member States, to have access to the accounts of general government entities; and ·Regulation (EU) No 1173/2011 on the effective enforcement of budgetary surveillance in the euro area, which introduced sanctions for the manipulation of statistics. Thanks to these efforts, the quality of EDP deficit and debt data has improved considerably in recent years. The strengthening of the legal framework supporting the production of EDP statistics led to considerable improvements in the area, as outlined in the Commission’s (Eurostat’s) annual reports on the quality of EDP data to the European Parliament and the Council (e.g. European Commission, 2019b). Member States’ production of EDP statistics is subject to close scrutiny by Eurostat, which makes periodical visits and issues country-specific advice on request by national statistical offices. When Eurostat has doubts as to the correct application of the rules, it can issue a reservation on EDP deficit or debt data reported by a Member State, or amend the data. However, these interrelated developments make it more difficult to separate the impact of Directive 2011/85 from other developments in this field. The auditing of public accounts is extensively regulated in all Member States, with approaches varying depending on the specificities of the sub-sectors of government or individual units. Most Member States have very comprehensive legislation regulating production, and internal and external audit of the public accounts, with national supreme audit offices playing a key role as independent external auditors. Budgetary units of central government are predominantly subject to auditing by national courts of auditors, national audit offices or equivalent supreme audit institutions (SAIs). Regional courts of audit and audit offices are also important in countries with sub‑national levels of administration. In some Member States, local governments and/or social security funds are audited by certified private audit firms, sometimes on behalf of the national SAI and with auditors chosen through public procurement procedures. It is more common to charge certified private auditors with the auditing of public companies that are included under general government for national accounts purposes. Directive 2011/85 recognises that this division of responsibilities between SAIs and certified private auditors is at the discretion of the Member States and it is often influenced in practice by factors such as company size, degree of government ownership, state financing and legal form, with SAIs frequently having specific rights with respect to such entities. In some Member States, SAIs are ultimately responsible for auditing all units classified under general government or, even more broadly, all public sector units. With respect to internal control, the situation is even more diverse, as Member States have different approaches to the degree of centralisation and how this function is implemented in practice. All Member States have arrangements for internal control and independent audits of public accounts; these generally differ according to sub-sector and the specificity of the unit in question. The impact of Directive 2011/85 is clearly visible when it comes to public sector accounting as such, where it has prompted work on a common set of accounting standards. As mentioned above, the Commission was tasked with assessing, by 31 December 2012, the suitability of the IPSASs for the Member States. In response, it produced a report to the European Parliament and the Council, Towards implementing harmonised public sector accounting standards in Member States: the suitability of IPSAS for the Member States. It found that governance, conceptual and technical issues meant that the IPSASs at the time were not suitable for direct implementation in the Member States. It also made the case for developing European public sector accounting standards (EPSASs), using the IPSASs as a reference, and concluded that ‘[t]he Commission will further develop the strategy outlined in this report, taking into account resource constraints, in line with its responsibilities under the Treaties’. In 2013, the Commission launched work on EPSASs geared to improving the transparency and comparability of financial reporting through the introduction of harmonised accruals‑based public sector accounting in the EU. The main benefit would be a firmer basis for understanding the financial position and performance of public sector entities at all levels. This has the potential to improve evidence-based decision-making and accountability at EU, national and sub-national levels. In addition, it would enhance the integration and efficiency of capital markets, the analysis of public finances and also provide more efficient ways of producing statistics and addressing potential risks. The work on EPSAS is currently proceeding in two phases: (I) increasing fiscal transparency in the short to medium term by encouraging and supporting accruals reforms in the Member States, while in parallel developing a draft EPSAS framework (Phase 1), with a view to

(II) addressing comparability within and between Member States in the context of the EPSAS initiative (Phase 2). Following the adoption of the IPSAS report, the services of the Commission have continued their work on EPSAS. The progress has been summarised in a dedicated Commission Staff Working Document published in June 2019. The Staff Working Document showed how the issues identified in the IPSAS report have been addressed. It concluded that during Phase 1, the readiness of the Member States to implement accrual accounting in their public sector has increased, while significant progress had also been made on the necessary technical preparations for taking the project forward. There is growing acknowledgment of the benefits of accrual accounting for government entities in the Member States, and of comparable financial accounting and reporting practices. The EPSAS work has involved in particular: ·engaging in systematic communication with policy‑makers, governments, auditors, accountancy experts, academics and other stakeholders; ·setting-up an EPSAS working group involving Member State experts representing all levels of government and the key EU and global stakeholders; ·issuing guidance for the first-time implementation of accruals accounting by public sector entities, developing the EPSAS conceptual framework and analysing key public sector specific accounting issues; ·collecting the evidence base for a future impact assessment; and ·in cooperation with the Commission’s Structural Reform Support Service, providing financial support in the form of grants and technical assistance to beneficiaries conducting national public sector accounting reforms. The Council has issued several conclusions on public sector accounting since the adoption of the IPSAS report. In particular, it has encouraged the Commission to engage actively various stakeholders and provide the Member States with technical and financial support. It has concluded that the work on EPSAS should be informed by a detailed impact assessment. In 2019, the Council recognised the progress made in this area. The European Parliament also noted the ongoing efforts to enhance the transparency and comparability of public accounts by developing EPSAS. The EPSAS-related work has already brought tangible benefits for the Member States and had positive spillovers beyond the EU. The Commission’s approach has had direct and indirect effects, such as supporting IPSAS development work and informing debates on government accounting reforms in a number of Member States. In recent years, around a third of the Member States have reported reforms, either to improve their existing accrual accounting and associated (e.g. budgeting) systems or to implement accrual accounting. Almost all Member States considered as having less advanced government accounting have either started to modernise their public sector accounting systems (e.g. Cyprus, Malta) or are preparing to do so (e.g. Greece, Luxembourg). More recently, Ireland has also taken steps to modernise its public sector accounting. Such reforms correspond to the aim of Article 3(1) of Directive 2011/85 insofar as they transform cash-based, mixed or otherwise fragmented public accounting systems to deliver complete, coherent and harmonised accruals-based public accounting systems. The Commission’s efforts in this area are also compatible with the work of the IMF, the OECD and the World Bank on public sector accounting reform, and go in the same direction as public accounting reforms elsewhere in the world. Stakeholders consider the lack of a single EU public accounting standard and the lack of common national standards as the main difficulties in implementing Directive 2011/85. The Commission surveyed the finance ministries, who in most cases set the national standards and prepare the accounts. The respondents to the survey reported some difficulties with the implementation of the provisions in Articles 3(1) and 12. While fewer than half of respondents experienced no, or only minor, difficulties, about a third considered the provision to be rather difficult to implement and around a quarter experienced some difficulties. Among those experiencing difficulties, the main reason given was the lack of a single public sector accounting standard in the EU, followed by the lack of single public sector accounting standard at national level. Among other reasons, a few respondents also referred to insufficient clarity with respect to the definition of public accounting systems in Directive 2011/85. Nevertheless, a clear majority of the finance ministries that responded assessed the consistency of their own accounting rules and the integrity of data collection and processing systems in their countries as ‘high’ or ‘very high’, with only a minority assessing this as ‘average’. High-frequency fiscal data Directive 2011/85 requires the publication of data for all sub-sectors of general government, while allowing flexibility with respect to the accounting basis. In particular: ·Article 3(2) requires the Member States to ensure: othe timely and regular public availability of cash-based fiscal data (or equivalent figures from public accounting) for all sub-sectors of general government, in particular: -monthly data for central government, state government and social security funds, before the end of the following month; and -quarterly data for local governments, before the end of the following quarter. opublication of a detailed reconciliation table showing the methodology of transition between cash-based (or equivalent) data and data based on the ESA standard; and ·Article 4(7) requires the Commission (Eurostat) to publish Member States’ quarterly deficit and debt levels every three months. Directive 2011/85 established a reporting system that removes the differences between national budgetary reporting and ESA with respect to the perimeter of general government. As discussed in Section 3.1.1, national budgetary data and fiscal outcomes based on ESA/EDP principles could differ significantly. If not properly monitored or taken into account, these differences constitute a source of fiscal risk. Ideally, high-frequency (monthly and quarterly) monitoring should be based fully on ESA principles to rule out deviations from fiscal targets expressed in terms of ESA/EDP deficit and debt, or ensure that deviations are corrected promptly when they occur. However, a number of Member States considered such a requirement disproportionately burdensome at the time the Directive was being discussed. As a result, the requirements in Directive 2011/85 seek to ensure that one of the two major sources of divergence (the perimeter of general government) is removed in the national high-frequency publications. As further explained in recital 7, it is possible to rely, where justified, on suitable estimation techniques based on a sample of bodies when compiling the data, with a subsequent revision using complete data. At the same time, the published data are in most (but not all) cases cash-based, differently from ESA/EDP reporting, which is based on accrual principle. Directive 2011/85 also allowed Member States to use equivalent figures from public accounting if cash data were not available; a minority of Member States made use of this possibility by publishing accrual or mixed cash/accrual data. Using accrual input data could further reduce differences between data required by Directive 2011/85 and ESA/EDP outcomes, while such differences can be comprehensively explained by means of statistical accrual adjustment. Nevertheless, in some circumstances the availability of cash data may bring an additional advantage in terms of signalling possible liquidity problems in times of market distress.

More than half the Member States have specific legal provisions to back the publication of high-frequency data. Among the Member States that have introduced such provisions, a majority did so in laws regulating the budgetary area; a minority introduced such requirements in ministerial decrees and circulars. The remaining Member States did not introduce explicit legal provisions on publishing the data. Overall, the publication requirements are well implemented in the Member States. All Member States publish the high-frequency data, although in a few cases coverage seems to be incomplete and data may be published with delays. In most, the data are published on the finance ministry website, in around a third on the website of the national statistical office and, in a few cases, on the websites of the treasury or specialised budgetary offices. While Eurostat tries to keep the list of websites up to date, Member States sometimes fail to notify changes promptly, resulting in obsolete links. Directive 2011/85 aimed to reduce gaps in data availability. Its requirements were partly a response to the uneven data availability observed across the EU, with timely public reporting on budgetary execution still very limited in many Member States at the time of its adoption. In recent years the budgetary authorities in a number of countries have made considerable efforts to improve overall transparency and facilitate accountability, in particular by publishing high-frequency analytical reports. While such reports are now published in most Member States, they often follow national budgetary definitions. The visibility of data published in accordance with Directive 2011/85 is sometimes low, with the domestic debate focusing on national budgetary concepts. The initial differences in transparency with respect to budgetary reporting also resulted in differences in the implementation of Directive 2011/85. In a few Member States in which the public reporting systems were created or substantially redesigned after the adoption of Directive 2011/85, publications have filled the gap and are better known to the public and media. However, in many Member States that had well‑known national budgetary publications previously, publications to comply with Directive 2011/85 were sometimes created as a separate reporting exercise and are considerably less known, as a rule. Moreover, very few of such publications attempt to explain in a comprehensive manner the differences between the national publication and ESA concepts. This may have affected the visibility of data: close to half of the publishing authorities assess the data to be of some interest to users, while one-third assess the interest as limited; only in a minority of Member States the publishing authorities assess that data are of great interest to users. Another reason for differences in the degree of public awareness may lie in the level of detail of published data. As mentioned above, the requirements in Directive 2011/85 were developed in more detail in the report from the task force. While the report did not alter the minimum requirements (publication of at least an overall balance, total revenue and total expenditure), it encouraged Member States to publish more detailed breakdowns by providing an indicative split by economic categories. However, in practice around a third of the Member States restrict the information made available to the minimum required by Directive 2011/85 (i.e. total revenue, total expenditure and balance of each sub-sector), while two thirds provide additional information. However, the level of detail varies considerably across countries. Where more detailed data are available, the publishing institutions tend to assess the degree of interest in the data to be higher, but this is not always the case and there are notable exceptions. High-frequency data are sometimes considered a source of disproportionate administrative burden, despite the possibility of using estimates. Some surveyed stakeholders argued that the data requirements constitute a disproportionate administrative burden in return for uncertain benefits for users. It is worth noting that, according to recital 7 of Directive 2011/85, where justified, timely publication of data could rely on suitable estimation techniques. A large majority of Member States use such estimates to various degrees, typically to cover small public bodies and less significant extra-budgetary funds, where only annual source data may be available. Only a few Member States do not use estimates, usually relying on comprehensive public sector accounting systems for input data. Using estimates can reduce administrative burden and be a second-best means of ensuring comprehensiveness. All Member States publish a detailed reconciliation table showing the methodology of transition between cash-based (or equivalent) data and data based on the ESA standard, with some differences in terms of approach and level of detail. As discussed above, the usefulness of data depends largely on users’ ability to relate it to other reported outcomes — national budgetary execution, on the one hand, and ESA/EDP deficit, on the other. To clarify the nature of Article 3(2) of Directive 2011/85 and encourage consistency in the presentation of the reconciliation tables, the task force agreed on an indicative flowchart of the information to be provided. While all Member States publish some form of reconciliation table, the approaches and level of detail vary significantly. By far the majority base the reconciliation table on the flowchart agreed by the task force. In addition to high-frequency data according to national definitions, Eurostat publishes quarterly deficit and debt data for all Member States according to the ESA/EDP standard. In recent years, Eurostat has significantly expanded the range of integrated quarterly data on government finance statistics, providing a timely and increasingly high quality picture of developments concerning government finances in the EU. Since the adoption of Directive 2011/85, Eurostat has increased significantly the level of validation checks performed, aiming to ensure the correct statistical recording of major transactions from the first quarterly transmission onwards and thereby make the data more relevant for users. Eurostat publishes quarterly (non-financial) data for all main ESA categories of government revenue and expenditure, and there is a separate quarterly publication on quarterly EDP debt by instrument and sub-sector. With respect to quarterly data on deficit and debt according to the ESA/EDP standard, as required by Directive 2011/85, Eurostat releases the data gradually up to around t+113 days after the end of the reference quarter. Eurostat had already published quarterly government debt data for all Member States before the adoption of Directive 2011/85, and a dedicated press release since 2012. Since April 2014, Eurostat has also published quarterly press releases with respect to general government deficit / surplus (as well as detailed non-financial and financial accounts) for all Member States. Since October 2014, Eurostat has collected quarterly non-financial data by sub-sector of general government. Currently, about half the Member States provide quarterly government revenue, expenditure as well as its breakdowns by sub-sector of general government. Similarly, Eurostat has collected seasonally adjusted data on the quarterly deficit / surplus since 2013 and has published a dedicated press release since February 2014. The press release with seasonally adjusted data for EU and euro area aggregates is complemented by a Statistics Explained page including seasonally and non-seasonally adjusted data for the Member States. Since April 2016, the press release has also highlighted country data. More Member States now provide seasonally and working day adjusted data, bringing the total number of them to 25. Directive 2011/85 requires Eurostat to publish quarterly data, while data collection is based on more fragmented requirements, and some data are collected on the basis of a ‘gentlemen’s agreement’. Article 4(7) of Directive 2011/85 obliges Eurostat to publish quarterly deficit and debt levels every three months. However, the corresponding obligation for the Member States to report the data is more fragmented. Eurostat makes use of obligations laid down in Regulation No 1221/2002, as well as obligations in the ESA 2010 Transmission Programme. However, those requirements do not fully cover the range of collected data, notably sub-sector breakdowns and seasonally adjusted data, and there are differences with respect to reporting standards and deadlines. Consequently, Eurostat collects some of that data on a voluntary basis under a ‘gentlemen’s agreement’, which may have practical implications in terms of availability of resources for data compilers. Transparency with respect to extra-budgetary bodies and funds Certain public funds, agencies and corporations may affect ESA/EDP deficit and debt without being covered by regular budgets; this is why Directive 2011/85 requires that information on these units and their budgetary impact be made available. An important aspect of avoiding ‘negative surprises’ concerns funds and bodies that are not covered by regular central, regional or local government budgets, but are classified under the general government sector for the purposes of ESA/EDP statistics. Such bodies can affect the fiscal outcomes that are relevant for EU budgetary surveillance and national fiscal rules, while not always being covered by planning documents and associated accountability procedures applicable to budgetary units. Accordingly, Article 14(1) of Directive 2011/85 lays down that ‘[w]ithin the framework of the annual budgetary processes, Member States shall identify and present all general government bodies and funds which do not form part of the regular budgets at sub-sector level, together with other relevant information. The combined impact on general government balances and debts of those general government bodies and funds shall be presented in the framework of the annual budgetary processes and the medium-term budgetary plans’. Transparency when it comes to identifying the units classified under general government is good overall, but uneven across Member States. The national statistical institutes are responsible for classifying units for statistical purposes, so information related to sector classification usually appears on their websites. A very large majority of Member States make information about general government bodies available to the public, with various approaches: more than half (including some large ones) make available lists where all general government units are identified individually, while a third publish lists grouping some of the smaller homogeneous units (e.g. local municipalities). A few countries maintain business registries that also include sector classification for statistical purposes. Given the importance of this information for the correct implementation of EU requirements in the field of ESA/EDP statistics, Eurostat also publishes lists or overviews of units included in general government on its website as annexes to the EDP inventories. The identification and presentation of such extra-budgetary bodies and funds in the budgetary process vary across Member States. Despite the overall high degree of transparency with respect to the lists of units classified under general government, it is possible only in a minority of Member States to distinguish clearly, on the basis of public sources, between general government units that are covered by regular budgets and those that are not. Further progress needs to be made with respect to presenting the combined impact of extra-budgetary bodies and funds on general government balances and debts in the annual budgetary process and in the medium-term budgetary plans: less than half of the Member States explicitly present the combined impact on general government balances and even fewer do so for debt. Many Member States found Article 14(1) of Directive 2011/85 difficult to implement. This emerged from the stakeholder consultation, where a third of the responding finance ministries considered it ‘very difficult’ or ‘difficult’ to implement, and another third cited ‘moderate’ difficulties. The main reported reasons for difficulties relate to administrative burden on small units, a lack of comprehensive data sources, insufficient quality of input data and the large number of units to be covered. Transparency with respect to contingent liabilities Member States are required to publish, for all sub-sectors of general government, relevant information on contingent liabilities with potentially large impacts on public budgets. Article 14(3) provides a non-exhaustive list of types of contingent liability to be reported: ‘(…) including government guarantees, non-performing loans, and liabilities stemming from the operations of public corporations’. Member States are also to publish (as a significant source of fiscal risk and, to a certain extent, an implicit contingent liability) ‘information on the participation of general government in the capital of private and public corporations in respect of economically significant amounts’. Directive 2011/85 has contributed to major progress in the reporting of data on contingent liabilities. In addition to the publication at national level, the statistical task force agreed that Eurostat should also collect and publish the above information (with the exception of general government participation in corporations, which remains a nationally published dataset), while adding to the list in Directive 2011/85 liabilities stemming from off-balance public‑private partnerships (PPPs). As a result, since 2015 Eurostat has published series of contingent liabilities indicators covering a period from 2010 onwards, which is an important step forward as regards the transparency of fiscal risks. More generally, Member States have taken the lead in developing these data in line with Directive 2011/85 and the current availability, coverage and data collection methodologies are advanced compared to other countries’. The completeness and coverage of data submitted to Eurostat vary across Member States and by component of contingent liability. As reported by Eurostat with regard to the 2018 data submission (with data coverage up to and including 2017), data completeness and coverage are high for government guarantees, although for local government guarantees data are still not available in few Member States and incomplete in few others. As with guarantees, data completeness and coverage are good for off-balance PPPs, with some shortcomings for local governments in a few cases. Information on non-performing loans (NPLs) still needs improvement, as data are missing for some Member States, while in several others data coverage is not exhaustive. As regards the submission of data on liabilities of government-controlled entities classified outside general government, in a few Member States data coverage is not exhaustive for local governments or for minor units.

The comparability of data across Member States is generally good, but some important aspects need to be borne in mind. Comparability is particularly good for government guarantees, NPLs and off-balance PPPs. For liabilities of public corporations, there are some differences in data reporting, notably arising from the accounting concepts used (some countries report business liabilities and others the ‘Maastricht’ liabilities). Nevertheless, Member States report significantly different levels of public corporations’ liabilities, because some have more entities controlled by general government and involved in financial services than others. Those countries report higher liabilities than those with few or no such entities. For Member States with a higher proportion of government-controlled financial institutions, many of the liabilities reported by financial institutions concern deposits held in public banks by households or by other private or public entities. In general, financial institutions report high amounts of debt liabilities; however, they also have significant assets that are not captured in the data collection. Another important aspect to be kept in mind is that the same fiscal risk might be reflected in two or more contingent liability indicators, e.g. if a government guarantees the liability of a public corporation, the potential risks are covered by data presented both for ‘guarantees’ and ‘liabilities of government‑controlled entities classified outside general government’. Therefore, evaluating the total risk by adding up the indicators could overestimate the potential impact. Graph 3.1.2: Usefulness of comparable EU data on contingent liabilities (stakeholders’ views) Source: Stakeholders survey The publication of information on contingent liabilities at national level, as required by Directive 2011/85, has also largely improved. All Member States except France and Greece currently publish that information nationally. As agreed by the task force, all indicators required by Directive 2011/85 should be published on a single dedicated national webpage. All publishing countries follow this guidance and provide the data on a dedicated webpage of the finance ministry or the national statistical institute. Almost all provide data nationally for all the indicators, while indicators on NPLs are still missing in a few. In some cases, national publication does not follow the task force guidelines, which specify the methodology and templates to be used. For a handful of Member States, there are (non‑significant) discrepancies between the data published nationally and data published by Eurostat. Member State practitioners broadly concur on the usefulness of reporting contingent liabilities. Most stakeholders consider the publication of the EU database on contingent liabilities as broadly useful for understanding fiscal risks in the Member States and deem the list of contingent liabilities to be adequate (see Graph 3.1.2). Suggestions for improvements, put forward mostly (but not only) by IFIs, include adding the potential impact of court decisions and pension liabilities, and, to a lesser extent, adding commitments related to euro area stability arrangements, implicit guarantees to the financial sector and callable capital of international organisations. In some cases, stakeholders would welcome more detailed information, e.g. for guarantees, off-balance PPPs (risk allocation) and NPLs (reporting separately data related to defeasance structures). National statistical institutes found more frequently that data on liabilities of financial public corporations should be published either net of assets or together with data on assets. Transparency with respect to tax expenditures Article 14(2) of Directive 2011/85 requires the Member States to publish detailed information on the impact of tax expenditures on revenues, but the meaning of ‘detailed’ is not specified. To promote a comprehensive and cross-country consistent approach to this requirement, a Commission note discussed at the Economic Policy Committee proposed guidelines as to what information on the impact of tax expenditures would most usefully serve the objectives of the Directive. The main recommendations in that note included: ·reporting on both existing and planned tax expenditures, coverage of the whole general government, time span covering at least two years (including the most recent year for which data are available and an estimate for the following year); ·presenting the impact in monetary terms; and ·providing a description of the main assumptions used for the definition and calculation of tax expenditures. While making available information on tax expenditures is a legal requirement in the vast majority of Member States, practices vary significantly. In the absence of content indications in the Directive or of a harmonised template or procedure, divergent practices lead to uneven transparency and usefulness for budgeting and fiscal planning purposes, thus preventing cross-country comparisons. Specifically, differences have emerged in terms of content, granularity, frequency of publication and the type of document in which the information is made public. The different approaches to tax expenditure transparency are most visible when it comes to the published content. Fewer than half the Member States publish information on both existing and new or planned tax expenditures, while the remaining publishing countries do so only for existing tax expenditures. The number of Member States whose reporting covers the whole of general government is particularly low, making up only a third. All Member States that publish the impact of tax expenditures do so in monetary terms, while over half make the underlying assumptions and methodologies available to the public. The categorisation of the tax expenditures is also diverse, the most widely used being by tax base (the vast majority of reports) and by purpose (about half). Three quarters of the Member States use more than one categorisation in their publications. An annual publication is the most common in terms of frequency. About three quarters of the Member States present information on tax expenditures annually, while others report less regularly. Table 3.1. Publication of information on tax expenditures in Member States Country Regular publications* Time coverage** BE X t-7, t-6, t-5, t-4, t-3, t-2 BG X t-2 CY X t CZ t-6, t-5 DK X t-1 DE X t-2, t-1, t, t+1 EE X t, t+1 IE X t-1, t EL X t-2 ES X t, t+1 FR X t-1, t, t+1 IT X t+1, t+2, t+3 NL X t-5, t-4, t-3, t-2, t-1, t AT X t-2, t-1, t, t+1 PT X t+1 SK X t-2, t-1, t, t+1, t+2, t+3 FI X t-1, t, t+1 LV X t-3, t-2, t-1 LU X t LT X t+1 RO X t-1, t, t+1, t+2 HU X t+1 PL X t-3 SE X t-1, t, t+1, t+2 UK X t-4, t-3, t-2, t-1, t Notes: The information reported refers to the 2018 edition of tax expenditure reports. * Regular reporting generally refers to an annual frequency; the exceptions are Germany (update every 2 years) and Denmark (where only the new tax expenditures and changes to existing ones are updated annually). ** Year t denotes the year of publication. Source: Commission services based on national sources. A particularly pertinent aspect for fiscal planning is the publication of forward‑looking information in order to estimate the medium-term impact of tax expenditures, both those in place and planned. Only about half the Member States present estimates for future years and in most cases the information made available covers only the very near future (year t+1 and in a few cases t+2). In terms of publishing forward-looking information that benefits medium-term fiscal planning the most, the Netherlands (although only until 2016) and Slovakia can be highlighted as examples of best practice, as they cover the past impact of tax expenditures since year t-2 and provide estimates for the whole medium-term horizon (until year t+3 for Slovakia and t+4 for the Netherlands). As of 2017, however, the latter only publishes backward-looking information. The information on the impact of tax expenditures is mostly published as part of the annual budgetary processes, but in a few cases it is published in a standalone document. Over half the Member States chose to incorporate it in national budgetary documents, be it in the annual budget or the medium-term plans. A third publish standalone documents and a few make the information public in a different format on the finance ministry’s website. 3.1.3.Conclusions In the area of public accounting, Directive 2011/85 has helped improve the quality of ESA/EDP data and given an impetus to developing public sector accounting standards in the EU. Directive 2011/85 aimed to improve the basis for compiling ESA/EDP deficit and debt data, which are crucial for the credibility of the EU surveillance framework, while at the same time stimulating wider use of public sector accounting, recognising its potential to improve the transparency of public finances and efficiency of public financial management. With respect to improving the overall quality of EDP statistics, where the overall legal framework was strengthened considerably in the aftermath of the sovereign debt crisis, the impact of Directive 2011/85 is more difficult to disentangle from other developments in the field of EDP statistics. Overall, data quality has clearly improved and recent public sector accounting reforms in the Member States have probably contributed to that. Nevertheless, in the absence of a common reference standard, sometimes also at national level, as reported by the stakeholders, national public accounting systems remain partially fragmented, thereby limiting the extent to which the aims of Directive 2011/85 in this area were met, as well as the potential efficiency gains. Directive 2011/85 helped kick-start broader work on developing public sector accounting in Europe, which also contributes to the improvement of global standards and governance in this area. In recent years, the readiness of the Member States to implement accrual accounting in their public sector has increased, while there has been significant progress towards developing common EU public sector accounting standards. At the same time, stakeholders consider the lack of common EU public sector accounting standards as one of the difficulties in implementing that element of Directive 2011/85. All Member States publish high-frequency fiscal data, but practices and data visibility vary. Fiscal data that are published shortly after the end of the reporting period help to ensure that possible deviations from the fiscal targets expressed in terms of ESA/EDP deficit and debt are detected and corrected in a timely manner. However, the level of detail of the published data varies, with some Member States publishing only a compulsory minimum and some providing more detailed breakdowns. While ideally such high frequency reporting should be based on ESA/EDP standard, Member States considered introducing such a requirement too burdensome at the time of discussing the Directive. The eventually agreed requirement is to publish monthly data for all sub-sectors of general government (except for local governments, for which data should be released quarterly), which are only partly aligned with the requirements of ESA/EDP statistics, with the alignment covering general government perimeter but not necessarily other aspects. On the other hand, the incomplete alignment is compensated by the timeliness of the data. The requirement to publish high-frequency fiscal data certainly helped to improve the transparency of public finances, particularly in countries with low initial levels of budgetary transparency. At the same time, in a number of Member States the users seem to struggle with the definition that lies in-between national budgetary concepts and ESA/EDP, resulting in modest data visibility. The limited level of detail and of explanatory information may have further contributed to this. Some stakeholders have consequently expressed concerns about the administrative burden they associate with the production of the monthly and quarterly data required by Directive 2011/85, against uncertain benefits for the users. Meanwhile, Eurostat’s publication of quarterly deficit and debt data based on ESA/EDP concepts has considerably improved in recent years, providing an alternative balance between the timeliness and the quality of information.

There is similar unevenness regarding transparency with respect to extra-budgetary bodies and funds and their impact on deficit and debt across the Member States. As extra-budgetary bodies and funds can affect the ESA/EDP deficit, they may represent a source of fiscal risk when not appropriately identified and taken into account at the planning stage. The majority of Member States publish information about all bodies and funds classified under general government for national accounts purposes, with some providing exhaustive lists and others grouping smaller units. However, in only a few countries is it possible to distinguish clearly between budgetary and extra-budgetary entities. Further progress needs to be made with respect to presenting the combined impact of extra-budgetary bodies on general government balances and debt. The stakeholder consultation also indicated that Article 14(1) was a difficult provision to implement. In the area of contingent liabilities, Directive 2011/85 resulted in a leap forward with respect to the transparency of associated fiscal risks. Almost all Member States now publish data on main types of contingent liability (government guarantees, off-balance PPPs, NPLs and liabilities stemming from the operations of public corporations), with minor pending issues related to the completeness and comparability of data. As a result, transparency in this area of fiscal risks has significantly increased. Some stakeholders propose further improving transparency by adding more detail to the information already provided, e.g. by including the asset side of the balance sheets of entities controlled by the government or disclosing information on flows related to contingent liabilities, as opposed to only stocks. Other ideas put forward include covering the potential impact of court decisions or liabilities related to the financial sector. With respect to the impact of tax expenditures, the practice is now well established and the overall level of transparency is good, but the form and content of publications differ across Member States. The general requirement to publish detailed information on the impact of tax expenditures on revenues resulted in a well-established practice in most Member States. Nonetheless, in the absence of more specific information requirements, the content and form of published information differ significantly across the board, leading to uneven transparency and usefulness for budgeting and fiscal planning purposes, and preventing cross-country comparison. Moreover, since there is no explicit obligation to present estimates of the medium-term impact of tax expenditures, which would be of substantial value for medium-term fiscal planning, most Member States currently publish only backward-looking or current information. Overall, Directive 2011/85 has clearly contributed to fiscal transparency and helped to improve the quality of statistical information; the most visible progress has been in areas where work to specify the requirements was done at technical level in the statistical task force. While Directive 2011/85 has contributed to improving the quality of statistical information and the transparency of budgetary processes in many areas, the most impressive progress relates to contingent liabilities, where it led to the establishment of a harmonised EU dataset. This was possible thanks to considerable technical work done by the EU statistical community in agreeing and implementing the underlying standards. At the same time, progress has been more limited where no common technical approach was agreed, e.g. in the area of transparency with respect to extra-budgetary units and funds, as well as tax expenditures. Similarly, in the absence of a common EU reference standard on public sector accounting, some national systems remain fragmented. How much Directive 2011/85 contributed to progress in individual Member States depended largely on the initial level of transparency or quality of underlying accounting and reporting systems, but it did help to even up transparency and quality of data across Member States. 3.2.Forecasts 3.2.1.General considerations Prudent forecasting methods and assumptions are amongst the cornerstones of realistic budgetary planning and, thus, of strong and sustainable public finances. However, putting into practice that conceptual consensus is challenging, and performance varies across Member States and over time. Member States’ average forecasting track-record in the pre-crisis era proved to be not so solid. In particular, there was a general trend of over-optimism in preparing both the macroeconomic forecasts underlying fiscal planning and the corresponding budgetary forecasts (Beetsma et al., 2009). That finding inspired recital 8 of Directive 2011/85, according to which ‘[b]iased and unrealistic macroeconomic and budgetary forecasts can considerably hamper the effectiveness of fiscal planning and consequently impair commitment to budgetary discipline (….)’. Accordingly, developing appropriate forecasting procedures, methodologies and models is of utmost importance for sound budgetary processes. Empirical studies show that transparent budgetary processes have a favourable impact on sovereign ratings and debt service costs (see e.g. Kemoe and Zhan, 2018). Fiscal transparency involves facilitating public access to timely, comprehensive and internationally comparable information on budgetary activities, including transparency of the preparation of official macro-fiscal forecasts. In that domain, as highlighted by recital 9 of Directive 2011/85, public availability should not only encompass the regular release of official projections, but the underlying methodological information as well. Directive 2011/85 recognises the importance of reliable macro-fiscal forecasts in budgetary planning. Specifically, it asserts the guiding principle that ‘Member States shall ensure that fiscal planning is based on realistic macroeconomic and budgetary forecasts’ and accordingly sets certain requirements for the format and content of national forecasting processes underpinning budgetary planning. As forecasts of independent bodies can provide useful benchmarks, Directive 2011/85 requires national authorities to compare their macroeconomic and budgetary forecasts with the latest forecasts of the Commission and, if appropriate, those of other independent bodies. There must be a reasoned description of significant differences between the chosen macro-fiscal scenario and the Commission’s forecast. The historical context of the proposal for Directive 2011/85 motivated the focus on the early identification and management of fiscal risks. To this end, Directive 2011/85 also requires Member States to complement their forecasts with a sensitivity analysis by stipulating that ‘the macroeconomic and budgetary forecasts shall examine paths of main fiscal variables under different assumptions as to growth and interest rates.’ Directive 2011/85 emphasises the importance of transparency and regular evaluation of past performance. It requires the specification of institutional responsibilities for producing macroeconomic and budgetary forecasts and the public release of the macroeconomic and budgetary forecasts prepared for fiscal planning, including ‘the methodologies, assumptions and relevant parameters underpinning those forecasts.’ To improve the quality of the projections and promote accountability, Directive 2011/85 also calls for ‘regular, unbiased and comprehensive evaluation’ of past forecasting performance, including ex post evaluations. If such evaluations detect a possible significant bias affecting macroeconomic forecasts over a period of at least four consecutive years, the Member State concerned is required to take the necessary action and make it public. It is essential to note that the provisions on forecasts in Article 4 of the Directive seek to cover both macroeconomic and budgetary forecasts whenever they are produced for fiscal planning purposes, namely with respect both to annual budgets and medium-term planning documents. In other words, the aim of Directive 2011/85 has been to put in place a set of basic procedures and practices that Member States follow systematically in the production and publication of their forecasts. While the default expectation in the context of Directive 2011/85 is that the outcomes of the key national budgetary documents reflect forecasting requirements, in some cases this can be done, to some extent, via documents prepared for EU fiscal surveillance purposes, i.e. stability and convergence programmes (SCPs) or draft budgetary plans (DBPs) for the euro-area Member States. Overall, the Directive provisions set out in Article 4 aim to orient the budgetary authorities of the Member States towards basing their fiscal planning on prudent forecasts, without redefining existing national timeframes and institutional responsibilities. In that respect Regulation No 473/2013, which applies to euro-area Member States only, goes much further, most notably by establishing a common budgetary timeline and introducing the obligation for the macroeconomic forecast underlying both draft annual budgets and national medium-term fiscal plans to be either produced or endorsed by independent bodies. Thereby Regulation No 473/2013, and in particular the independent endorsement requirement, influenced considerably the design of the forecasting procedure in the Member States concerned, and their adherence to the principle of realism. Therefore, in a number of respects, it is very challenging to disentangle the specific impact of the Directive from the influence of other relevant factors. 3.2.2.Main developments In the area of forecasting, Directive 2011/85 essentially set additional content requirements for the presentation of the macroeconomic and budgetary projections and sought to boost their transparency. Applying the provisions included in Article 4 typically required some fine-tuning of previously existing approaches and procedures, without, however, amounting to a fundamental revamp of the forecasting process. Given the specific and technical nature of the provisions in question, Member States transposed them through a combination of legislative vehicles and other types of measures. While the majority of Member States amended their organic laws on public finances to cater for the transposition of some elements, in several cases legal acts ranking lower in the domestic legal order, or administrative acts, had to be amended (e.g. government or ministerial decrees, budgetary circulars, cooperation agreements), as those were the established vehicles for regulating forecasting issues. An overview of transposition and implementation developments by the main forecasting provisions of Directive 2011/85 follows hereinafter. Principle of realism

Member States must adhere to the principle of realism in their budgetary processes. To achieve this objective, Article 4(1) of Directive 2011/85 requires them to base the budgetary planning on the most likely macro-fiscal or on a more prudent scenario. The overwhelming majority of Member States have chosen to codify that principle in their legislation. Compliance with it in practice cannot be measured directly, but it can be proxied by recent empirical studies on the evolution of forecast prudency. There is some preliminary empirical evidence that the prudency of official forecasts has improved recently. As regards the track-record of national macroeconomic forecasts in the last two decades, Jankovics and Sherwood (2017) use information from the SCPs (as a proxy for national fiscal plans) for a subset of Member States and provide some illustrative calculations through the aggregation of the sign of the forecast bias for real GDP (as measured by the mean forecast error) before and after the Great Recession (and consequently the recent wave of European economic governance reform). A small optimistic bias was found in the first period (2000-2007) under review, which turned into a slightly conservative stance in the second period (2014-2016). As regards national budgetary forecasts, based on a very similar methodology, European Commission (2014) reported an optimistic bias for the headline balance projections, to the tune of 0.4 pp of GDP on average. Turning to more recent years, overview reports by the Commission (2016a, 2017, 2018) found that EU average headline balances turned out better than forecast in the successive vintages of SCPs by 0.3-0.4 pp. of GDP over the 2015-2017 period, i.e. again, a moderate reversal of the bias. However, a number of important caveats call for caution in interpreting those results. First, as mentioned previously, there have been other important pieces of EU legislation apart from Directive 2011/85 (most notably, the independent production or endorsement requirement set out in Article 4(4) of Regulation 473/2013). They could have had more impact on the national authorities’ forecasting behaviour. Secondly, only a short period has elapsed since the entry into force of the fiscal governance reforms at both European and national level. Thirdly, policy-makers tend to be more optimistic in good economic times, while forecasting more cautiously in bad times. The slow and protracted recovery in many Member States after the depths of the crisis could therefore have played a role in the observed reversal of the sign of the forecast error. Graph 3.2.1: Evolution in forecast prudency compared to the pre-crisis period (stakeholders’ views) Macroeconomic forecasts Budgetary forecasts Source: Stakeholder survey Nonetheless, stakeholders’ views corroborated the mildly positive assessment emerging from the empirical studies. A significant number of Member State experts and practitioners were of the view that forecasts had become more plausible recently, in particular if compared to the years leading up the crisis (2000-2007). As can be seen in Graph 3.2.1, 40% of the surveyed stakeholders saw such an improvement in macroeconomic forecasts, and 30% in budgetary forecasts (noteworthy, no entity assessed that the situation had deteriorated). A similar conclusion can be drawn from the Commission’s assessments of the plausibility of the macroeconomic forecasts underlying SCPs and DBPs. Slightly over three-quarters of its assessments issued between autumn 2015 and spring 2018 concluded that the macroeconomic scenarios were plausible or even conservative, while the remaining quarter assessed the scenarios as optimistic, which primarily concerned the outer years of the medium-term forecast horizons in the SCPs . Transparency through forecast comparisons and explanations The transparency of the national forecasts could be improved by systematic comparisons and explanations for major differences vis-à-vis the Commission’s forecasts. The Commission’s macroeconomic and budgetary forecasts, in particular its external assumptions and projections for foreign trade, have traditionally served as a numerical benchmark for national macro-fiscal scenarios. Directive 2011/85 sought to increase transparency by obliging the national authorities – pursuant to Article 4(1) – to present explicit comparisons of their forecasts with ‘the most updated forecasts of the Commission’ and to provide explanations of ‘significant differences’. Graph 3.2.2: Explanations about the differences between the Member State’s macro-fiscal scenario and the Commission’s forecast (stakeholders’ views) Source: Stakeholder survey While Member States have generally introduced corresponding legal provisions following the adoption of Directive 2011/85, implementation differs. Transposition was warranted also where some practice predated Directive 2011/85 without being based on legal acts, so as to anchor the comparison principle more firmly. However, practice varies among Member States. About a third have developed comprehensive and systematic coverage for such comparisons, which are currently included in all national fiscal planning documents. In a quarter of Member States comparisons to date have either been missing from a key national document (typically the annual budget documentation) or they have covered only one dimension (typically the macroeconomic projections). Finally, there are still a number of countries where relevant practice has not been established yet, for example because of the very recent introduction of transposing provisions in the domestic legal order or the lack of proper national provisions. When comparison of national with Commission forecasts reveals significant differences, Directive 2011/85 requires that these be ‘described with reasoning’. Assessing the appropriateness of this provision as set out in Article 4(1), which is arguably rather general, would require a survey of how Member States have implemented it in practice. However, that task is objectively limited by the fact that in many cases there have been no major differences between the national and Commission projections in the recent period. Consequently, the lack of explanatory texts may simply reflect the convergence of views on the forecasts. The stakeholders share that interpretation (see Graph 3.2.2). A number of respondents from Member States with episode(s) of significant differences highlighted timing differences and sequencing as important factors. Specifically, in case of both medium-term fiscal plans and draft annual budgets, at the time of the preparation of the national baseline scenario, the available Commission’s forecasts are already four or five months old and thus based on different information. If that factor is the main reason for the differences (rather than e.g. a different appreciation of tax elasticities or impacts of new policy measures), the explanations are naturally succinct. Even so, 37% of respondents assessed the justifications available in national documents as detailed. Specification of forecasting responsibility and methodological transparency Article 4(5) of Directive 2011/85 requires Member States to ‘specify which institution is responsible for producing macroeconomic and budgetary forecasts’. Moreover, with a view to increasing transparency, Member States ‘shall make public the official macroeconomic and budgetary forecasts prepared for fiscal planning, including the methodologies, assumptions and relevant parameters underpinning those forecasts.’ Specifying responsibility for the provision of the official macroeconomic and budgetary forecasts was one of the least problematic elements from a transposition angle. The ease of transposition is reflected in the fact that the Directive per se did not trigger any change in the mandates of national forecasting institutions. It rather led to the formalisation of the existing practices in the few cases where they were not already explicitly laid down in legislation. Most notably, countries that had in the past delegated the production of the official macroeconomic forecasts to independent fiscal institutions (i.e. Austria, Belgium, Luxembourg, the Netherlands, Slovenia and the United Kingdom – in the latter case, the mandate also covers the fiscal baseline forecast) continued to rely on those arrangements. Member States are required to make public not only the outcome of the forecast, but also their methodology so as to allow better scrutiny of quality. While some half of the Member States have transposed the related requirements into their national legal order, it is the practice, rather than legal provisions that is key to the effectiveness of that requirement. In general, explanatory documents related to the macroeconomic forecasts (including in some cases the description of the models in use) are typically far more available than information about budgetary forecasting techniques. In that domain, the independent fiscal institutions with the mandate to produce the forecasts (see above) clearly constitute one type of best practice (see in particular the ‘Briefing notes’ series by the United Kingdom’s Office for Budget Responsibility or the Luxembourgish STATEC’s series on ‘Economie et statistiques’). Another type of best practice is in place in a number of Member States where governments provide a rich set of information on both the macroeconomic and budgetary forecasts, including through self-standing technical notes; Denmark, Ireland, Slovakia, and Sweden can be singled out in that respect. In contrast, a handful of Member States have made available so far only some technical assumptions listed in an annex of a fiscal planning document. Sensitivity analysis A customary way to recognise and better appreciate the uncertainty inherent in the macro-fiscal forecasts underlying policy plans is to estimate their sensitivity to changes in key parameters. Doing so is a means of illustrating ways in which the economy and the budget might diverge from the baseline. Such analysis is typically carried out through altering a number of key economic parameters or assumption judgements in isolation (sensitivity analysis), but other approaches are also possible (albeit technically more challenging), such as looking at fully-fledged alternative economic scenarios or publishing the probability distribution around the central scenario in a ‘fan chart’.

Directive 2011/85 requires Member States to conduct forecast sensitivity analyses when preparing budgetary documents. Notably, Article 4(4) specifies two types of shocks to be investigated as a minimum (‘(…) shall examine paths of main fiscal variables under different assumptions as to growth and interest rates.’). It should be recalled that – with the exception of Croatia which acceded to the EU in July 2013 – all Member States had been preparing some sensitivity analyses as part of their SCPs long before Directive 2011/85 was adopted. This was part of the model structure of the SCPs, as defined in the Code of Conduct (‘(….) in order to enable the Commission and the Council to consider the complete range of possible fiscal outcomes’), with even more specifications on the types of shocks to be covered. In particular, the Code of Conduct specifies that the underlying assumptions about how revenues and expenditures are projected to react to variations in economic variables should be shown. For non-euro area Member States, the analysis in the convergence programmes should include the impacts of different exchange-rate assumptions on the budgetary and debt position. A third of Member States limit themselves to providing a sensitivity analysis in their SCPs rather than in domestic fiscal planning documents. In some of those cases, the calculations cover only various assumptions as to the GDP trajectory and provide no shock scenarios on interest rates. On the other hand, over half of the Member States do publish analysis in their national documents, in most cases with comprehensive coverage of shocks. A few Member States not only attach a sensitivity analysis to their official forecasts, but also issue separate reports on fiscal risks, the scope of which is much wider than required by Directive 2011/85, e.g. including risks stemming from contingent liabilities or from operations in the financial sector. Regular forecast evaluations Preparing regular evaluations on forecasting performance is important for a number of reasons. First, analysing how outturns have evolved relative to the respective forecasts allows learning lessons for future forecasts by better understanding the underlying drivers of the economy and public finances. Secondly, it represents a systematic way of measuring the performance of forecasting assumptions and models in use. Last but not least, transparently reporting on the reasons for differences between projections and outturns reinforces the accountability of the forecasting institutions. Against that backdrop, Article 4(6) of Directive 2011/85 requires the macroeconomic and budgetary forecasts for fiscal planning to be subject to ‘regular, unbiased and comprehensive evaluation’. Such evaluations must be made public. Directive 2011/85 also establishes the obligation for a formal follow-up where a significant bias is detected for macroeconomic forecasts over a period of at least four consecutive years. The requirements related to forecast evaluation warrant important conceptual clarifications. First, dedicated, backward-looking evaluations of forecast accuracy for the purposes of Directive 2011/85are not to be confused with and substituted by plausibility assessments of forward-looking projections prepared in ‘real-time’ by an independen