Compliance in Progress Summary
In 2005, the International Monetary Fund (IMF) published a fiscal transparency module of its Report on the Observance of Standards and Codes (ROSC) for Spain. According to this report, Spain "fully meets or exceeds" the IMF’s Code of Good Practices on Fiscal Transparency in many areas. It has modernized and strengthened its fiscal institutions, and it has made progress in the dissemination of information regarding the government's fiscal activities. While the ROSC was positive in many respects, it did identify areas in which improvements could be achieved. For example, Spain could permit external scrutiny of the government's macroeconomic forecasts and assumptions. It could make public both its macroeconomic forecasts and the models on which the forecasts are based. The ROSC also found that coverage of government operations in budget documents was relatively comprehensive, but complained that the information was dispersed. It suggested that compilation be done, so that the information is more easily accessible to the general public. Lastly, the ROSC noted that the assignment of supervisory responsibilities for budget execution is confusing. The Ministry of Economy and Finance is responsible for executing the budget; the General Directorate of the Budget is in charge of budget modifications; the Directorate General for the Treasury handles cash and debt management; and the General Controller and Accounting Directorate oversees internal control, audit, accounting, and reporting. The IMF recommended that these duties be streamlined. Spain is part of the euro zone countries experiencing severe fiscal crisis. A 2010 IMF mission to Spain acknowledged that the government has taken a wide range of measures, but cautioned that implementation will be most critical. The mission also encouraged bold pension reform to reduce spending pressure and a stronger fiscal framework to guarantee that Autonomous Communities, where the bulk of spending occurs, deliver the needed adjustment.
General Overview
A 2005 fiscal transparency module of the International Monetary Fund's (IMF) Report on the Observance of Standards and Codes (ROSC) for Spain found the country to have modernized and strengthened its fiscal institutions and its communication with the public regarding government operations. In the words of the ROSC, Spain "now fully meets or exceeds" (p. 1) many of the principles with regard to the IMF’s Code of Good Practices on Fiscal Transparency. The ROSC reported that the Spanish Constitution defines the roles and responsibilities of general government and follows the 1995 European System of Account Accords in clearly setting the main government sectors apart from the private sector. Furthermore, the distinction between the government and private sector is replicated at the regional and local government levels. The ROSC attested that Spain had a clear fiscal legal framework, comprising the Constitution (Article 134), the General Budget Law, Budgetary Stability Laws, Annual Budget Laws, and Annual Budget Formulation Decrees. All the legislation governing fiscal activity is available to the public. According to the ROSC, the General Budget Law and an annual Ministry of Economy and Finance (MEH) order regulate the budget process and delineate the guidelines for the preparation of the budget. In the area of execution, however, the ROSC found Spain's arrangements to be somewhat unclear. The MEH is responsible for executing the budget; the Directorate General for Budget is in charge of budget modifications; the Directorate General for the Treasury handles cash and debt management; and the General Controller and Accounting Directorate (IGAE) oversees internal control, audit, accounting, and reporting. To reduce the confusion and potential overlapping responsibilities, the ROSC recommended that Spain improve the coordination between budget execution and financial management.
The ROSC further reported that Spain's fiscal authorities are required by law to report on fiscal developments and aggregates. For example, Article 136 of Law No. 47 of 2003 requires the IGAE to report monthly on the execution of the budget in the Official State Gazette (Boletín Oficial del Estado). Information on gross public debt and financial assets, such as the level and composition of general government debt, is also published regularly. The Bank of Spain (BdE) publishes quarterly data on the central government, the social security fund, and the regional government (Comunidades Autónomas, CCAA) and local government debt on its website. These data are also sent to the IMF for its Special Data Dissemination Standard (SDDS). Monthly data are published on state revenue and expenditures, except for debt data, which are published quarterly. General government operations data are published annually. In addition to publishing financial flows (i.e. accrual adjustments and stocks valued at market value), the BdE also publishes data on gross and net government financial assets. The ROSC pointed out several areas where Spain's fiscal authorities could improve the public availability of information on government operations. For example, while noting that the coverage of government operations in budget documents is relatively comprehensive, the ROSC found the information to be in need of compilation to make it more readily understood by the general public.
The Spanish Constitution established the fully independent Court of Accounts (TCU), which is entrusted with the responsibility for conducting ex post audit of financial operations of the general government. The Court prepares audit reports on the accounts of all components of the public sector, as well as on the contracts of the central public sector, and presents its finalized reports directly to Parliament. Parliamentary committees that liaise with the TCU then vote on the resolutions presented by parliamentary groups. All audit reports are publicly available in the Official State Gazette and the Court may freely convey its opinion in public. Nevertheless, the ROSC noted that the scope of auditing is narrow, since "the audit functions of the TCU focus mainly on compliance with legislation and financial targets," adding that the "the capacity to carry out performance auditing is constrained by the low quality or absence of performance indicators" (p. 34).
In its 2007 Article IV Consultations report, the IMF recommended that Spain improve its ability "to ensure fiscal discipline in a highly decentralized system" (p. 10). The report added that "with extensive decentralization, strengthened transparency and monitoring… remain the most effective means to secure fiscal discipline at the regional and local government levels" (p. 10). Insufficient reporting of off-budget capital spending and the lengthy lags in the publication of national accounts-based data for territorial governments were cited as particular weaknesses in Spain's fiscal policy transparency and monitoring system. While praising some ongoing efforts to solve these problems (i.e. a recent census of regional public entities), the report nonetheless recommended that Spain conduct a thorough review of the efficiency of "productive expenditure" spending (i.e. R&D) that had been featured in successive budgets. The IMF also recommended that Spain allow for independent scrutiny of fiscal policy plans and outturns.
A 2008 Article IV report (published in 2009) noted that Spain was hit hard by the global economic downturn, particularly with the collapse of the housing boom. Falling revenues at both the local and national levels presented a significant weakening of the fiscal accounts. In response, and in conjunction with the broader EU, Spain has implemented stimulus measures which, for fiscal year 2008-2009, equaled four percent of GDP. The IMF projected that Spain would experience a fall from 2007's surplus of 2.2 percent of GDP to a 6.1 percent headline deficit and a 5.2 percent structural deficit in 2009. Spanish authorities had a somewhat lower structural deficit estimate, arguing that the stimulus spending was temporary, and an exit strategy was in place. Fiscal sustainability, particularly with regard to the debt, was raised as a significant problem. The IMF noted in its 2008 Article IV report that "Spain has one of the highest aging costs among advanced countries and those in the EU Aging Working Group" (p. 28), and added that current policies would entail "unsustainable debt dynamics" (p. 30). The IMF suggested that, in the current economic environment, "fiscal policies need to be embedded in a long-run context to explain how policies can be made sustainable" (p. 39).
Spain has been caught in the euro zone’s fiscal crisis. As a May 2010 concluding statement to the 2010 Article IV consultations notes, various measures to restore fiscal sustainability are under way. Ambitious fiscal consolidation is underway to reach the three percent of GDP deficit target by 2013. To achieve the implied 10 percent of GDP improvement in the primary balance from 2009 to 2013, the government has taken a wide range of measures, according to the IMF. The IMF noted, however, that any diversion from the agreed upon targets will make it difficult to put government debt on a firm downward path in a reasonable timeframe and would undermine credibility. To support long-term sustainability, the IMF mission also encouraged bold pension reform to reduce spending pressure. A stronger fiscal framework was also considered to be beneficial. Since most of the spending occurs in Autonomous Communities, their role is critical, underscoring the need for strong mechanisms to ensure they deliver the needed adjustment. Institutionalizing spending review processes could also help improve the quality and durability of spending reductions.
The Principles
CPClarity of roles and responsibilities.
According to the IMF's 2005 ROSC fiscal transparency module, fiscal policy in Spain "fully meets or exceeds" (p. 1) the standards of the IMF’s Code of Good Practices on Fiscal Transparency in many respects. The Spanish Constitution defines the roles and responsibilities of general government and clearly sets Spain's main government sectors apart from the private sector in line with the 1995 European System of Account Accords. Furthermore, the distinction between the government and private sector is replicated at the regional and local government levels. The ROSC noted that the Constitution and other legislation specific to individual government agencies provide a clear legal framework for fiscal activity. Article 134 of the Spanish Constitution defines and formalizes the budget and financial management system in Spain. Additionally, the General Budget Law, Budgetary Stability Laws, Annual Budget Laws and Annual Budget Formulation Decrees provide the legal framework for fiscal management, which are all publicly available. Mechanisms for examining and amending the budget are well defined and governed by strict rules restricting the parliament's powers. According to the ROSC, the legislative and legal basis for taxation, regulation, and administrative procedures are clear and governed primarily by Articles 133 and 134 of the Constitution, the General Tax Code of 2003 and other tax laws, all of which are published in the Official State Gazette and are readily available on the website of the Ministry of Economy and Finance.
The ROSC laid out areas in which Spain can improve the clarity of roles and responsibilities regarding fiscal policy. It argued that the practical application of the Constitutional criteria set forth to define the role of general government and distinguish between the public and private sectors "has tended to blur the boundaries between the government and public enterprises sectors" ( p. 35). According to the ROSC, the Budgetary Stability Laws (BSLs) "have established the principle of budgetary equilibrium as the cornerstone of fiscal management," but "information on sub-national government budget execution is not adequate to allow full and timely control of the application of this law" (p. 36). The ROSC reported that the Spanish government was considering revising the BSLs to strengthen reporting and transparency requirements.
CPOpen budget processes
The IMF's 2005 fiscal ROSC observed that Spain had an open annual budget process, and found the presentation of the budget to comport with international standards, in large part. The budget process is regulated by provisions of the General Budget Law and an annual MEH order. These two documents also set out the guidelines for budget preparation. However, the ROSC noted that the assignment of supervisory responsibilities for budget execution is diffused across several agencies. The MEH is responsible for executing the budget; the Directorate General for Budget is in charge of budget modifications; the Directorate General for the Treasury handles cash and debt management; and IGAE oversees internal control, audit, accounting, and reporting. Coordination between budget execution and financial management is called for.
According to the 2005 ROSC, the overall balance of the general government is the main indicator of the fiscal position, and this is monitored and publicized during the year. The ROSC noted that "information on revenue developments is monitored on a timely basis by the tax administration; all stages of the expenditure process are appropriately recorded in the Government Financial Management Information System (GFMIS); thus, information on each stage is available on a timely basis" (p. 40). Additionally, a statement on macroeconomic assumptions underlying the budget forecasts is presented in the annual budget documents. However, Spain does not permit external scrutiny of macroeconomic forecasts and assumptions. Macroeconomic forecasts and the models on which the forecasts were based, are not made available to the public. While medium-term fiscal policy targets are published twice a year, they are not part of the budget documents. The rules and regulations for internal control and audit overseen by IGAE are clearly specified, and the accounting system is capable of producing accurate in-year reports on the central government budget outturn.
The ROSC made several key recommendations to increase transparency in the formulation of budgetary policies. First, is recommended that the authorities provide a clearer and detailed explanation of rationale for the specific fiscal targets in each annual budget. Second, it called for Spain to carry out a comprehensive revision of the government accounting plan to closely align it to ESA-95. Third, the IMF suggested that Spain bring its functional classification in the budget fully into line with the international standards of Government Finance Statistics, 2001 edition. Finally, the ROSC recommended that Spain develop its medium-term fiscal scenario into a full-fledged rolling medium-term budget framework (MTBF), including multi-year projections for main revenue categories.
IIPublic availability of information.
According to the IMF's 2005 fiscal ROSC, "coverage of government operations in budget documents is relatively comprehensive" (p. 38). However, the assessment does not specifically address Spain's compliance level with this principle. Spain publishes a wide range of reports and other sources that deal with fiscal developments and aggregates, and many of these publications are required by law. For example, Article 136 of Law No. 47 of 2003 requires the IGAE to provide monthly reports on the execution of the budget in the Official State Gazette. Information on gross public debt and financial assets, such as the level and composition of general government debt, is also published regularly.
The BdE publishes quarterly data on central government, social security fund, CCAA and local government debt on its website and submits these data to the SDDS, as well. Monthly data are provided on state revenue and expenditures, while debt data are published quarterly and general government operations data is published on an annual basis. In addition to publishing financial flows (i.e. accrual adjustments and stocks valued at market value), the BdE also publishes data on gross and net government financial assets. Furthermore, the IGAE publishes comprehensive data on fiscal outturns for the general government and its enterprises on the basis of ESA-95, but with a two-year lag. The ROSC noted that Spain subscribes to the IMF’s Special Data Dissemination Standard and "meets the timetable for providing data on state administration and general government operations" (p. 24). In addition, Spain meets the requirements concerning the regular publication of fiscal data and preceding timetables for their release. Spain also fulfils its obligations to the European Union to submit annual general government fiscal data to the appropriate EU authorities as part of the excess deficit exercise.
The ROSC highlighted several areas where public availability of information on government operations in Spain could be improved. It found the coverage of government operations in budget documents to be relatively comprehensive, but observed that the information is dispersed and in need of compilation to make it more easily accessible to the general public. In addition, the ROSC noted that the publication of information about the central government's budget outturns does not fully meet the IMF's standards, since it is delayed for more than two years. The ROSC noted that the timely publication of annual consolidated general government accounts is also undermined by lengthy lags. The IMF recommended that Spanish authorities "move as quickly as possible to publish the quarterly preliminary data on general government compiled by IGAE, and to shorten the delay in publication of final annual data to under one year" (p. 38).
CPIndependent assurances of integrity.
The IMF's 2005 ROSC stated that fiscal information in Spain is subject to independent scrutiny and that "external audit arrangements are broadly in line with international standards" (p. 42). Established by the Spanish Constitution, the Court of Accounts is fully independent and is entrusted with the responsibility for conducting ex post audit of financial operations of the general government. The TCU prepares audit reports on the accounts of all components of the public sector, as well as on the contracts of the central public sector, and presents these reports directly to Parliament. Parliamentary committees that liaise with the TCU vote on the resolutions presented by parliamentary groups. All audit reports are publicly available in the Official State Gazette and the Court may freely convey its opinion in public. Nevertheless, the ROSC observed that the scope of auditing is narrow, since "the audit functions of the [TCU] focus mainly on compliance with legislation and financial targets" (p. 34). In addition the TCU is constrained in its conduct of performance audits by "the low quality or absence of performance indicators" (p. 34). The National Statistics Institute is independent by virtue of Law No. 12 of 1989 on Public Statistics (Article 30 and 35). It manages Spain's national statistics system and employs fiscal information in preparing the national accounts.
The ROSC made several suggestions aimed at improving independent assurances of integrity in fiscal matters. For example, having observed that the budget documents offered no clear and systematic explanation of deviations between budget forecasts and outturns, the IMF recommended that such explanations be included in budget documents. The ROSC also observed that the Spanish authorities could improve the transparency and reliability of budget forecasts by exposing them to independent scrutiny by industry and academic experts. Finally, the IMF recommended that the Spanish Parliament set up a non-partisan budget office to conduct an independent analysis of the government's budget proposals.
