The reform of the fiscal framework in Spain: constitutional limits and the new public spending growth rule

In the last two decades the developed countries have significantly modified the framework in which fiscal policy operates. In particular, they have adopted fiscal rules setting explicit caps on the deficit or public debt and/or on certain budgetary items so as to ensure the sustainability of public finances. The empirical evidence available broadly confirms that fiscal rules may prove effective in obtaining and maintaining budgetary discipline [Debrun et al. (2008) and European Commission (2009)]. Moreover, it is found that their presence increases the likelihood of fiscal consolidations being successful, which is particularly important in circumstances such as those at present, in which the deterioration in public finances brought about during the economic crisis must be corrected [IMF (2009)]. The same literature emphasises, however, that the design of fiscal rules largely influences their effectiveness. Aspects such as their definition, control and application mechanisms, and the procedure for correction in the event of deviations, are crucial for attaining the objectives laid down [Bohn and Inman (1996) and Ayusi-i-Casals et al. (2009)]. Establishing fiscal rules that make it obligatory to maintain healthy public finances is all the more important in a monetary union since, as has been seen in the case of the sovereign debt crisis affecting the euro area since early 2010, one member’s inappropriate fiscal policies may have adverse repercussions for the other members and generate union-wide tensions. Insofar as the financial markets do not always act as a deterrent to these policies, it becomes necessary to set fiscal controls on the Member States, obliging them to internalise the effect of their decisions on the union as a whole. It is this very reasoning that prompted the inclusion in the Treaty on European Union of limits on the members’ deficits and public debt, which were complemented by the Stability and Growth Pact (SGP). However, the economic crisis has highlighted the problems of the workings of the SGP, which was incapable of promoting a sustained fiscal consolidation during the economic upturn. This meant that the crisis led to an unprecedented deterioration in most European countries’ fiscal position and outlook, which in some cases began to be perceived as unsustainable. The economic policy response to the euro area’s sovereign debt crisis is far-reaching and includes, among other aspects, a revision of the EU economic governance framework. In addition to the need to create crisis-management mechanisms, the strong interrelatedness of macroeconomic, fiscal and financial problems has revealed the need for wider and more intense economic policy coordination in the monetary union, which has taken specific form in the design of a new framework for the monitoring of macroeconomic imbalances and of competitiveness [ECB (2011) and Caballero et al. (2011)]. On the fiscal front, a reform of the SGP aimed at strengthening its implementation is pending approval. Among other aspects, the reform acknowledges the importance of an appropriate definition of fiscal frameworks not only at the European level, but also at the national level; accordingly, the Member States are asked to meet minimum requirements in respect of their fiscal frameworks so that these may contribute more effectively to attaining budgetary stability. In the same respect, the Euro Plus Pact entered into by the euro area Heads of State and Government on March 2011 included the commitment by members to transpose into national legislation the EU budgetary rules established in the SGP. Spain already had budgetary stability legislation (BSL) setting limits on the deficit that all tiers of government may incur. Nonetheless, it has been decided to reinforce this framework further to the approval in September 2011 of a reform of the Constitution that incorporates into the constitutional text the deficit and debt limits set at European level. Previously, in July 2011, a public spending growth rule was introduced for central government and for the biggest municipal councils. Under this rule, the rate of increase of public spending may not annually exceed the economy’s nominal medium-term growth rate. This article analyses these changes. The following section briefly describes the reform of the SGP. The third section analyses the constitutional reform. Section 4 describes the spending rule and illustrates its functioning through a simulation of how such a rule would have worked during the expansion period. Section 5 draws conclusions.