## 1. The Austrian Internal Stability Pact and the Revenue-Sharing Act

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---

### I. Introduction: Purpose and context of an MTBF
- Definition:
  - An MTBF is defined as a framework that regulates policymakers’ formulation and implementation of medium-term/multiyear fiscal policies; it may or may not include a fiscal policy rule that sets numerical restrictions on key fiscal policy objectives.
- Purposes of an MTBF:
  - Promote fiscal discipline and address fiscal vulnerabilities through increased transparency, stronger accountability, and a more pronounced medium-term perspective.
- International context:
  - Many industrial countries, including in the EU (e.g., the Netherlands and Sweden), have explicit MTBFs in place.
  - Some countries (e.g., Denmark) set and formulate fiscal policies along similar lines without formally adopting an MTBF.
- Paper objectives:
  - Describe the Austrian framework set to apply to the 2009 budget and onwards.
  - Assess it in light of the experience of other countries, identifying characteristics that have been effective, aspects that have caused or could cause problems, and possible trade-offs.

### II. Motivations for budgetary reform in Austria
- Key motivations:
  - Promote medium-term-oriented fiscal policies with an emphasis on the expenditure side, and on disciplined execution to avoid persistent fiscal deficits and debt buildup.
  - Achieve the goal of budget balance over the cycle for the general government; this objective was clearly stated in the January 2007 Government Program.
  - Focus on expenditures because there is limited room for fiscal consolidation through higher taxes, inter alia due to increased international economic integration.
- Fiscal context and constraints:
  - Public expenditures are high, at almost 50 percent of GDP.
  - The general government budget has only reached balance once since the early 1970s.
  - General government public finances are restricted by Austria’s commitments through the Stability and Growth Pact (SGP) as a euro area country.
  - The finances of lower-level governments and their fiscal relationships with the federal level are regulated by the Internal Stability Pact and the Revenue-Sharing Act.

### III. Scope and political support
- Political economy:
  - Broad political support exists for the Austrian MTBF.
  - Current reforms focus on the federal government; the Internal Stability Pact and Revenue-Sharing Act regulate lower-level governments and their fiscal relationships with the federal level.
- Institutional schematic:
  - Reform plans targeted at the federal level within the existing federal / provinces / municipalities structure and constrained by the Stability and Growth Pact and the Internal Stability Pact.

### IV. Key design features of the MTBF (law published January, 2008)
- Applicability and timing:
  - The law establishing an MTBF was passed and published in the federal gazette in January, 2008.
  - The new law will first apply to the 2009 budget.
- Formal objectives:
  - The constitution declares sustainable government finances and macroeconomic equilibrium as general objectives.
- Time horizon and update mechanics:
  - The MTBF applies to the expenditure side, covers four years, and will be rolled forward by one year every spring.
- Nature of expenditure ceilings:
  - The expenditure ceilings for individual ministries would be binding the first year, while the ceilings for the last three years would be indicative.
  - Two types of expenditure ceilings:
    - Cyclically sensitive expenditures will be set by parameters.
    - Other expenditures will be fixed in nominal terms.
- Strategic allocation:
  - To set strategic expenditure priorities, expenditures will be broken down by individual policy areas and subsequently allocated among ministries.

### V. Data notes and reference timing
- Cut-off date for most data included in the paper was end-2007; data are mostly based on the WEO, October, 2007.

### Box 1 — Institutional structure and key instruments
- Institutional structure:
  - Three key levels of government in Austria: federal, provincial, and municipal.
  - Constitutional framework lays out expenditure responsibilities and taxing powers.
  - Bulk of tax revenues is collected at the federal level; spending is more decentralized and funds are transferred vertically.
- Two medium-term agreements since 1999:
  - The Revenue-sharing agreement (Finanzausgleich):
    - Regulates transfers to subnational governments.
    - Federal revenues are distributed among subnational governments based mainly on the size of their population, with some adjustments in favor of larger municipalities and provinces with per capita revenue below the national average.
    - The agreement becomes federal law, the Fiscal Equalization Law (Finanzausgleichgesetz).
  - The Austrian Stability Pact (Internal Stability Pact):
    - Allocates to each province and to the whole of the municipalities annual budget surplus targets measured as a ratio to GDP.
    - Only small annual deviations from the targets are allowed: 0.15 percent of GDP for the states; 0.10 percent for the municipalities.
    - Any deviation has to be made up for in the following years.
    - The pact becomes law after ratification by the federal and provincial parliaments.
    - If the targets are breached, penalties apply.

### Observations on federal MTBF proposal and subnational linkages
- Coverage gaps and risks:
  - The budgetary reforms do not include rules governing lower-level government budgets and their relationship with the federal government.
  - The Internal Stability Pact could be a good basis to build upon for a closer linkage between the MTBF for the federal government and the medium-term budgets for states and municipalities.
  - This linkage is important because expenditures at the subnational level account for about one third of all public spending.
  - There is no explicit provision in the proposal for a balanced budget over the cycle; Austria is subject to the SGP, which stipulates limits and reference values for overall budget balances and public debt levels.
  - The MTBF does not include a requirement to conduct and incorporate a long-term fiscal sustainability analysis.
  - There is no explicit error-correction mechanism that would apply in case actual budget outcomes are significantly different from the budgets; deviations are to be corrected in the annual updates of the framework.

### Planned further budgeting reform (implementation horizon and principles)
- Implementation horizon:
  - Further budgeting reform will be implemented together with the MTBF and will take at least four–five years to fully implement.
- Four major planned principles:
  - (i) Performance budgeting: shift from input-oriented budgeting to more direct linking of expenditures to objectives.
  - (ii) Transparency: encompassing current principles of budget transparency, exhaustiveness of the budget, unequivocal assignments of responsibility in the budgetary process, and provision of timely information on execution.
  - (iii) Efficiency: applying to all forms of government activity with a focus on spending of budgetary resources.
  - (iv) Accuracy in representing the financial situation of the federal government: implying sophisticated systems of budgeting, accounting, and reporting.

### Comparative experience and lessons relevant to Austria
- General lessons:
  - MTBFs typically combine fiscal responsibility principles and numerical fiscal policy rules (e.g., multiyear expenditure ceilings).
  - Transparency, public clarity, and accountability are key (examples: Australia, New Zealand).
  - Establishing a strong track record early builds credibility and raises political costs of deviations.
  - Broad-based budgetary reform (including performance budgeting) increases the likelihood of a successful MTBF (examples: Netherlands, Sweden, New Zealand).
  - Long-term analyses as part of short- and medium-term policy strengthen MTBF credibility and sustainability.
  - Regional and local governments can complicate MTBF implementation when they are large, politically powerful, or fiscally independent.
  - Multiyear expenditure rules have in some cases helped discipline expenditures (examples: Netherlands and Sweden), though rules alone are not sufficient.
  - Fiscal policy rules can have procyclical tendencies, especially when windfalls are treated permissively (examples: Sweden and the Netherlands).

### Implications and policy recommendations for Austria
- Value of the MTBF:
  - An MTBF is welcome and can complement and deepen commitments under the SGP, contributing to macroeconomic stability, predictability, and fiscal sustainability.
  - The framework can facilitate formulation, implementation, and communication of fiscal policies and serve as a basis for policy discussions and coalition agreements.
- Design priorities:
  - The basic outline, including multiyear expenditure ceilings, seems appropriate given limited room for tax hikes; controlling expenditure should be the focus.
  - Austria should make transparency and public clarity key features of the MTBF; legislated principles of transparency and public clarity have been effective elsewhere.
  - The MTBF should be introduced as part of a broader reform agenda to improve fiscal management; parallel implementation of related reforms is important.
  - Long-term considerations (e.g., demographic pressures) should be integral to the framework; long-term goals and restrictions should be mapped to concrete medium-term targets that anchor expenditure ceilings.
- Subnational government issues:
  - It is essential to analyze and address implications for subnational governments:
    - The Internal Stability Pact’s targets for annual balances do not vary with the cyclical position of the economy, creating an element of procyclicality at lower levels of government.
    - The pact does not specify in detail how subnational governments should reach their budget targets.
- Buffers and windfalls:
  - The inclusion of mandatory buffers in budgetary projections is welcome and could be complemented by a mechanism for dealing with unexpected windfalls; however, buffers can be used up quickly and may push problems forward.
  - It is advisable to have a system to prevent unexpected, possibly temporary, savings or revenues from being used for additional spending or tax cuts, to avoid structural fiscal loosening.
- Implementation and credibility:
  - Political will, reputation, and accountability are essential for the MTBF’s credibility; broad-based political support and quickly establishing a good track record are important.

*Source: IMF working paper chapter "1. The Austrian Internal Stability Pact and the Revenue-Sharing Act" (content up to the description of the MTBF as provided).*

### 1. The Austrian Internal Stability Pact and the Revenue-Sharing Act ................................6

### 1. The Austrian Internal Stability Pact and the Revenue-Sharing Act ................................6

### I. Introduction: Purpose and context of an MTBF
- An MTBF is defined as a framework that regulates policymakers’ formulation and implementation of medium-term/multiyear fiscal policies; it may or may not include a fiscal policy rule that sets numerical restrictions on key fiscal policy objectives.
- Purposes of an MTBF:
  - Promote fiscal discipline and address fiscal vulnerabilities through increased transparency, stronger accountability, and a more pronounced medium-term perspective.
- International context:
  - Many industrial countries, including in the EU (e.g., the Netherlands and Sweden), have explicit MTBFs in place.
  - Some countries (e.g., Denmark) set and formulate fiscal policies along similar lines without formally adopting an MTBF.
- Paper objectives:
  - Describe the Austrian framework set to apply to the 2009 budget and onwards.
  - Assess it in light of the experience of other countries, identifying characteristics that have been effective, aspects that have caused or could cause problems, and possible trade-offs.

### II. Motivations for budgetary reform in Austria
- Key motivations:
  - Promote medium-term-oriented fiscal policies with an emphasis on the expenditure side, and on disciplined execution to avoid persistent fiscal deficits and debt buildup.
  - Achieve the goal of budget balance over the cycle for the general government; this objective was clearly stated in the January 2007 Government Program.
  - Focus on expenditures because there is limited room for fiscal consolidation through higher taxes, inter alia due to increased international economic integration.
- Fiscal context and constraints:
  - Public expenditures are high, at almost 50 percent of GDP.
  - The general government budget has only reached balance once since the early 1970s.
  - General government public finances are restricted by Austria’s commitments through the Stability and Growth Pact (SGP) as a euro area country.
  - The finances of lower-level governments and their fiscal relationships with the federal level are regulated by the Internal Stability Pact and the Revenue-Sharing Act.

### III. Scope and political support
- Broad political support exists for the Austrian MTBF.
- Current reforms focus on the federal government; the Internal Stability Pact and Revenue-Sharing Act regulate lower-level governments and their fiscal relationships with the federal level.
- Austria: Reform Plans in Current Fiscal Structure (schematic): Federal / Provinces / Municipalities with Stability and Growth Pact and Internal Stability Pact noted; area for current reform plans at the federal level.

### IV. Key design features of the MTBF (law published January, 2008)
- Applicability:
  - The law establishing an MTBF was passed and published in the federal gazette in January, 2008.
  - The new law will first apply to the 2009 budget.
- Formal objectives:
  - The constitution declares sustainable government finances and macroeconomic equilibrium as general objectives.
- Time horizon and update mechanics:
  - The MTBF applies to the expenditure side, covers four years, and will be rolled forward by one year every spring.
- Nature of expenditure ceilings:
  - The expenditure ceilings for individual ministries would be binding the first year, while the ceilings for the last three years would be indicative.
  - Two types of expenditure ceilings:
    - Cyclically sensitive expenditures will be set by parameters.
    - Other expenditures will be fixed in nominal terms.
- Strategic allocation:
  - To set strategic expenditure priorities, expenditures will be broken down by individual policy areas and subsequently allocated among ministries.

### V. Data notes and reference timing
- Cut-off date for most data included in the paper was end-2007; data are mostly based on the WEO, October, 2007.

*Source: IMF working paper chapter "1. The Austrian Internal Stability Pact and the Revenue-Sharing Act" (content up to the description of the MTBF as provided).*

### Box 1. The Austrian Internal Stability Pact and the Revenue Sharing Act*

### Box 1. The Austrian Internal Stability Pact and the Revenue Sharing Act

### Institutional structure and key instruments
- Three key levels of government in Austria: federal, provincial, and municipal.
- Constitutional framework lays out expenditure responsibilities and taxing powers.
- Bulk of tax revenues is collected at the federal level; spending is more decentralized and funds are transferred vertically.
- Since 1999, fiscal policies at the three levels are coordinated through two medium-term agreements:
  - The Revenue-sharing agreement (Finanzausgleich):
    - Regulates transfers to subnational governments.
    - Federal revenues are distributed among subnational governments based mainly on the size of their population, with some adjustments in favor of larger municipalities and provinces with per capita revenue below the national average.
    - The agreement becomes federal law, the Fiscal Equalization Law (Finanzausgleichgesetz).
  - The Austrian Stability Pact (Internal Stability Pact):
    - Established in line with the euro area SGP.
    - Allocates to each province and to the whole of the municipalities annual budget surplus targets measured as a ratio to GDP.
    - Only small annual deviations from the targets are allowed: 0.15 percent of GDP for the states; 0.10 percent for the municipalities.
    - Any deviation has to be made up for in the following years.
    - The pact becomes law after ratification by the federal and provincial parliaments.
    - If the targets are breached, penalties apply.

### Observations on current federal MTBF proposal and subnational linkages
- The budgetary reforms do not include rules governing lower-level government budgets and their relationship with the federal government.
- The Austrian Internal Stability Pact could be a good basis to build upon for a closer linkage between the MTBF for the federal government and the medium-term budgets for states and municipalities.
- This linkage is important because expenditures at the subnational level account for about one third of all public spending.
- There is no explicit provision in the proposal for a balanced budget over the cycle; Austria is subject to the SGP, which stipulates limits and reference values for overall budget balances and public debt levels.
- The MTBF does not include a requirement to conduct and incorporate a long-term fiscal sustainability analysis.
- There is no explicit error-correction mechanism that would apply in case actual budget outcomes are significantly different from the budgets; deviations are to be corrected in the annual updates of the framework.

### Planned further budgeting reform (implementation horizon and principles)
- Further budgeting reform will be implemented together with the MTBF and will take at least four–five years to fully implement.
- Four major “principles” of budgeting are planned to be implemented:
  - (i) Performance budgeting: shift from input-oriented budgeting to more direct linking of expenditures to objectives.
  - (ii) Transparency: encompassing current principles of budget transparency, exhaustiveness of the budget, unequivocal assignments of responsibility in the budgetary process, and provision of timely information on execution.
  - (iii) Efficiency: applying to all forms of government activity with a focus on spending of budgetary resources.
  - (iv) Accuracy in representing the financial situation of the federal government: implying sophisticated systems of budgeting, accounting, and reporting.

### Comparative experience and lessons relevant to Austria
- MTBFs typically combine fiscal responsibility principles and numerical fiscal policy rules (e.g., multiyear expenditure ceilings).
- Experience from other countries highlights:
  - Transparency, public clarity, and accountability are key (examples: Australia, New Zealand).
  - Establishing a strong track record early builds credibility and raises political costs of deviations.
  - Broad-based budgetary reform (including performance budgeting) increases the likelihood of a successful MTBF (examples: Netherlands, Sweden, New Zealand).
  - Long-term analyses as part of short- and medium-term policy strengthen MTBF credibility and sustainability.
  - Regional and local governments can complicate MTBF implementation when they are large, politically powerful, or fiscally independent.
  - Multiyear expenditure rules have in some cases helped discipline expenditures (examples: Netherlands and Sweden), though rules alone are not sufficient.
  - Fiscal policy rules can have procyclical tendencies, especially when windfalls are treated permissively (examples: Sweden and the Netherlands).

### Implications and policy recommendations for Austria
- An MTBF is welcome and can complement and deepen commitments under the SGP, contributing to macroeconomic stability, predictability, and fiscal sustainability.
- The framework can facilitate formulation, implementation, and communication of fiscal policies and serve as a basis for policy discussions and coalition agreements.
- The basic outline, including multiyear expenditure ceilings, seems appropriate given limited room for tax hikes; controlling expenditure should be the focus.
- Austria should make transparency and public clarity key features of the MTBF; legislated principles of transparency and public clarity have been effective elsewhere.
- The MTBF should be introduced as part of a broader reform agenda to improve fiscal management; parallel implementation of related reforms is important.
- Long-term considerations (e.g., demographic pressures) should be integral to the framework; long-term goals and restrictions should be mapped to concrete medium-term targets that anchor expenditure ceilings.
- It is essential to analyze and address implications for subnational governments:
  - The Internal Stability Pact’s targets for annual balances do not vary with the cyclical position of the economy, creating an element of procyclicality at lower levels of government.
  - The pact does not specify in detail how subnational governments should reach their budget targets.
- The inclusion of mandatory buffers in budgetary projections is welcome and could be complemented by a mechanism for dealing with unexpected windfalls; however, buffers can be used up quickly and may push problems forward.
- It is advisable to have a system to prevent unexpected, possibly temporary, savings or revenues from being used for additional spending or tax cuts, to avoid structural fiscal loosening.
- Political will, reputation, and accountability are essential for the MTBF’s credibility; broad-based political support and quickly establishing a good track record are important.

*Box in IMF working paper.*

### References

### _wp08163 - References

### References
- Annett, A., 2003, “Emerging Strains on the Swedish Fiscal Framework: Recent Developments and Future Prospects,” in Sweden: Selected Issues, IMF Country Report No. 03/231 (Washington: International Monetary Fund).
- ———, J. Decressin, and M. Deppler, 2005, “Reforming the Stability and Growth Pact,” IMF Policy Discussion Paper 05/2 (Washington: International Monetary Fund).
- Australian Treasury, 1998, Charter of Budget Honesty Act, No. 22 (Canberra: Australian Treasury).
- Austrian Federal Ministry of Finance, 2005, Austrian Stability Programme Update for the Period 2005 to 2008 (Vienna: Austria Federal Ministry of Finance).
- ———, 2007, Austrian Stability Programme Update for the Period 2007 to 2010 (Vienna: Austria Federal Ministry of Finance).
- Balassone, F., 2005, “The Swedish Fiscal Framework: Towards Gradual Erosion?,” in Sweden: Selected Issues, IMF Country Report No. 05/344 (Washington: International Monetary Fund).
- Blöndal, J.R., and J. Kromann Kristensen, 2002, ”Budgeting in the Netherlands,” OECD Journal on Budgeting, Vol. 1 (No. 3), pp. 43–80.
- Bodmer, F., 2006, “The Swiss Debt Brake: How It Works and What Can Go Wrong,” Schweizerische Zeitschrift für Volkswirtschaft und Statistik 3/142, pp. 307–30.
- Danninger, S., 2002, “A New Rule: “The Swiss Debt Brake”,” in Switzerland: Selected Issues, IMF Country Report No. 02/18 (Washington: International Monetary Fund).
- Diebalek, L., W. Köhler-Töglhofer, and D. Prammer, 2005, “The Austrian Stability Pact 2001-2004—Design, Objectives and Effectiveness,” Wirtschaftspolitische Blätter 2/2005, pp. 291-305.
- Eskesen, L.L., 2002, “The Danish Fiscal Framework—Looking Back and Ahead,” in Denmark: Selected Issues, IMF Country Report No. 02/102 (Washington: International Monetary Fund).
- Finland Ministry of Finance, 2003, Statsrådets Beslut om Principerna för Statsfinanserna, Budgetförslag samt Verksamhets- och Ekonomiplaner (Helsinki: Finland Ministry of Finance).
- ———, 2005, Ramar för Statsfinanserna 2006–09, VM 5/214/2005 (Helsinki: Finland Ministry of Finance).
- Fuentes, A., E. Wurzel, and A. Wörgötter, 2006, “Reforming Federal Fiscal Relations in Austria,” OECD Economic Department Working Papers No. 474 (Paris: Organisation for Economic Cooperation and Development).
- Hallerberg, M., R. Strauch, and J. von Hagen, 2004, “The Design of Fiscal Rules and Forms of Governance in European Union Countries,” European Central Bank Working Paper Series No. 419 (Frankfurt: European Central Bank).
- Hofman, D., 2005, “Budgetary Policymaking in the Netherlands,” in Kingdom of the Netherlands – the Netherlands: Selected Issues, IMF Country Report No. 05/225 (Washington: International Monetary Fund).
- Honjo, K., 2007, “The Golden Rule and the Economic Cycle,” in United Kingdom: Selected Issues, IMF Country Report No. 07/90 (Washington: International Monetary Fund).
- International Monetary Fund, 2005, New Zealand: 2005 Article IV Consultation - Staff Report, IMF Country Report No. 05/152 (Washington: International Monetary Fund).
- ———, 2006a, Belgium: 2006 Article IV Consultation—Staff Report, IMF Country Report No. 06/74 (Washington: International Monetary Fund).
- ———, 2006b, Spain: 2006 Article IV Consultation—Staff Report, IMF Country Report No. 06/211 (Washington: International Monetary Fund).
- ———, 2007a, Austria: 2007 Article IV Consultation—Staff Report, IMF Country Report No. 07/145 (Washington: International Monetary Fund).
- ———, 2007b, United Kingdom: 2006 Article IV Consultation—Staff Report, IMF Country Report No. 07/91 (Washington: International Monetary Fund).
- Jaeger, A., 2001, “Cyclical Fiscal Policy Behavior in EU Countries,” in Monetary and Exchange Rate Policies of the Euro Area: Selected Issues, IMF Staff Country Report No. 01/201 (Washington: International Monetary Fund).
- Janssen, J., 2001, “New Zealand’s Fiscal Policy Framework: Experience and Evolution,” Treasury Working Paper 01/25 (Wellington: The Treasury).
- Koeva, P., 2005, “The Implementation of the Golden Rule over the Cycle,” in United Kingdom: Selected Issues, IMF Country Report No. 05/81 (Washington: International Monetary Fund).
- Morris, R., H. Ongena, and L. Schuknecht, 2006, “The Reform and Implementation of the Stability and Growth Pact,” European Central Bank Occasional Paper Series No. 47 (Frankfurt: European Central Bank).
- New Zealand Treasury, 1996, Fiscal Responsibility Act 1994: An Explanation (Wellington: The Treasury).
- Organisation for Economic Co-operation and Development, 2004, The Legal Framework for Budget Systems: an International Comparison, Special Issue, OECD Journal on Budgeting Volume 4 (No. 3).
- ———, 2006, Economic Surveys: Canada (Paris: Organisation for Economic Co-operation and Development).
- Schratzenstaller, M., 2005, “A New Revenue Sharing Act and a New Stability Pact for Austria – No Fundamental Changes,” Austrian Economic Quarterly Vol.1, pp. 12-22.
- Simes, R., 2003, “Fiscal Policy Rules in Australia,” paper for the Chifley Research Centre (Canberra: Chifley Research Centre).
- Tijsseling, I.C., and P.G.J. van Uden, 2004, Made in Holland – Dutch Public Finance: Lessons and Experiences (Den Haag: National Academy for Finance and Economy).
- Wierts, P., 2008, “How do Expenditure Rules affect Fiscal Behaviour?,” De Nederlandsche Bank Working Paper No. 166/2008 (Amsterdam: De Nederlandsche Bank).
- Zhou, J., 2004, “Recent Fiscal Developments in the Netherlands,” in Kingdom of the Netherlands – The Netherlands: Selected Issues, IMF Country Report No. 04/301 (Washington: International Monetary Fund).

### APPENDIX: BRIEF OVERVIEW OF MEDIUM-TERM BUDGETARY FRAMEWORKS IN OTHER COUNTRIES — Australia
- In 1998, Australia adopted the Charter of Budget Honesty Act 1998, in order to establish a fiscal framework that provides for greater fiscal discipline, transparency and accountability in fiscal policy.
- The Charter requires the Government to set out its medium-term fiscal strategy in each budget and to release economic and fiscal outlook reports at budget, mid-year and before elections to enable an assessment of actual fiscal performance against its fiscal strategy.
- The time horizon is four years rolling (the budget year and the following three years), with an intergenerational report at least every five years.
- The primary objective of the previous Australian Government’s medium-term fiscal strategy, as set out in successive budgets, was to maintain budget balance, on average, over the course of the economic cycle.
- The medium-term fiscal strategy had a number of sub-objectives, including:
  - maintaining budget surpluses over the forward estimates period while growth prospects were sound;
  - not increasing the overall tax burden from 1996-97 levels; and
  - improving the Australian Government’s net worth position over the medium to longer term.
- The supplementary objective of no increase in the overall tax burden was intended to ensure that the Government achieved budget balance over the cycle through a disciplined approach to spending and not by recourse to increased taxation.
- Under the Charter of Budget Honesty Act 1998, the recently elected Australian Government will formally release and table its first fiscal strategy statement in the Australian Parliament before its first budget in May 2008.
- The new Australian Government committed during the 2007 election campaign to adhering to a medium-term fiscal strategy that keeps the budget in surplus on average over the economic cycle without increasing the overall tax burden.
- In light of inflationary pressures, the Australian Government has since announced that it will aim to deliver a budget surplus of at least 1.5 percent of GDP in 2008-09, provided growth prospects remain as currently anticipated.
- As in the case of New Zealand, this framework has been successful, despite the absence of an adjustment rule, and one important advantage seems to have been predictability.
- Net debt has been declining since 1996, expenditure as share of GDP has been declining, and the fiscal balances have been solid.
- In both of the successful cases of New Zealand and Australia, the elected governments assume responsibility for establishing and meeting fiscal targets, rather than these being specifically mandated within the relevant legislation.
- Footnotes and references cited in this section (as presented in the source):
  - 23 See e.g. Australian Treasury (1998), and Simes (2003).
  - 24 The previous Australian Government was in office from March 1996 to November 2007.
  - 25 ALP National Platform and Constitution 2007.
  - 26 Speech by the Prime Minister of Australia, the Hon Kevin Rudd MP, titled Building Australia’s Economic Future, 21 January 2008.

### APPENDIX: BRIEF OVERVIEW OF MEDIUM-TERM BUDGETARY FRAMEWORKS IN OTHER COUNTRIES — Belgium
- Belgium's fiscal framework consists of three components:
  - (i) A political commitment to a medium-term path for the nominal general government deficit. This is enshrined in the coalition agreement, typically negotiated every four years following elections.
  - (ii) A formal midterm budget adjustment procedure for the federal budget. Every year in June an assessment is made of whether the budget execution is on track, and adjustments are adopted to stay within the original target. In addition, quarterly budgetary controls, including one in September, are performed to ensure that budgetary objectives are met at year’s end. These controls often result in one-off adjustments.
  - (iii) An internal stability pact between the federal government and the regional governments. This is a political agreement in which the regions commit to a medium-term path for their nominal budget balance, consistent with targets agreed for the general government in the context of Belgium’s Stability Program.
- The framework has been successful, with budgetary targets achieved since its inception in

*Source: _wp08163 - References*

### 2000. The internal stability pact has also promoted consensus for consolidation across levels

### _wp08163 - 2000. The internal stability pact has also promoted consensus for consolidation across levels

### Summary of framework strengths and weaknesses
- The internal stability pact has promoted consensus for consolidation across levels of government and the general public.
- Drawbacks of the framework:
  - The focus on nominal targets maintains a procyclical bias.
  - It has led to an over reliance on one-off measures, often involving trade-offs of current benefits for future outlays, instead of producing durable measures.
  - Reform of fiscal federalism arrangements appears needed to achieve the expected medium-term buildup of fiscal surpluses.

### Country experiences and major features
- Canada
  - No fiscal rules at the federal level and no legal requirements to provide medium- and long-term fiscal strategies and objectives.
  - The annual Economic and Fiscal Update voluntarily includes five-year fiscal projections and intentions.
  - The Minister of Finance voluntarily provides an ex post report on budget implementation every year.
  - Historical measures:
    - Spending Control Act in 1992 set nominal spending targets for five years (1991/92-1995/96); act was implemented but not renewed.
    - 1994/95 reforms introduced two-year rolling fiscal targets, contingency reserves, and a commitment to economic prudence in the budget (introduced without legislation).
  - Fiscal outcomes since early 1990s: balanced or better budget outcomes since 1997 and falling debt ratios.

- Denmark
  - No legal framework beyond the SGP regulating medium-term fiscal policy formulation or reporting.
  - Move toward medium- and long-term fiscal policy and explicit medium-term fiscal targets over the last decade.
  - 1997: first medium-term fiscal plan through 2005 targeting reduction of public debt to 40 percent to GDP by targeting real public consumption growth and introducing structural reforms; a budget surplus target was later added.
  - 2001: plan updated and extended to 2010; budget surplus target modified to be set as a target range over the business cycle.
  - Long-term fiscal sustainability calculations made in cooperation with academic economists using advanced techniques.
  - Main weakness: difficulty restraining spending at the local level; local government spending exceeding ceilings caused repeated breaches of real public consumption growth targets.

- Finland
  - Current MTBF introduced in 2003; reform began in 1991 after early 1990s recession.
  - Based on multi-year expenditure framework adopted in 1995.
  - When a new government takes office, it formulates a four-year framework covering its term; expenditure caps expressed at constant prices and broken down into 14 broad administrative areas.
  - Framework adjusted yearly for price changes and extended by adding years so a new four-year framework is adopted.
  - Focus on years within a government’s term; part beyond current term is not binding.
  - Some expenditures excluded (those dependent on the business cycle and interest on public debt).
  - Framework does not include fiscal balance or public debt targets; Stability Program submitted to the European Commission sets such targets.
  - Local governments are to be balanced by law.
  - Outcome: one of the strongest fiscal track records since the mid-1990s.

- The Netherlands
  - MTBF in place since 1994; motivated by need to discipline spending beyond deficit/surplus targets and to make room for tax cuts.
  - New government formulates overall budgetary policy for its four-year term as part of coalition agreement; includes concrete budget objectives operationalized annually.
  - Budget policy anchor: level of expenditure with fixed maximum caps in real terms established for each sector; automatic stabilizers work through the revenue side.
  - Caps intended to be based on cautious macroeconomic assumptions; late 1990s assumptions were not conservative in hindsight.
  - Procyclicality issues:
    - No prior rules on handling lower-than-expected expenditures led to structural expenditure increases.
    - With weaker growth in 2002-03, fiscal situation became problematic, prompting stricter rules on use of lower-than-expected expenditures.
    - Treatment of revenue windfalls changed: rule that all windfalls should go to debt reduction (previously part dedicated to tax cuts).

- New Zealand
  - 1994 Fiscal Responsibility Act legislated principles of transparency and mandatory short-, medium-, and long-term plans.
  - Act stipulates:
    - New Zealand has to run an operating surplus over the cycle.
    - Public debt should be lowered to prudent levels.
    - Level of public net worth provides a buffer against adverse future events.
  - Net worth includes non-debt liabilities such as pensions.
  - Numerical targets were considered but rejected for four reasons:
    1. No clear optimal fiscal target.
    2. Rigid adherence to targets can distort decision making; minor deviations can be overly costly in terms of credibility loss.
    3. Specific targets are inflexible and may prevent appropriate policy responses to changing circumstances.
    4. Fiscal targets can be circumvented; without political will, goals will not be met.
  - Time horizon: three years rolling, with updated long-term outlook (ten years minimum) every year.
  - No adjustment rule besides reputation; predictability seen as important advantage.
  - Outcomes: debt on steady declining trend since early 1990s, expenditures as share of GDP declining, fiscal balances solid.

- Spain
  - Budgetary Stability Law (BSL) adopted in 2001, took full effect in 2003; new BSL took effect in 2007 introducing greater cyclical flexibility and aimed to increase ownership and observance by the regions.
  - Motivations: lock in achievements, enhance fiscal discipline and transparency, complement regional financing agreement, address future demographic challenges.
  - Framework targets fiscal balance over the cycle for the general government, excluding the social security system.
  - To avoid defining cyclical position, establishes targets for three states:
    - Fiscal balance for normal growth.
    - Small public deficit for low growth.
    - Surplus for high growth.
  - Social security system envisages a separate target to ensure financial sustainability.
  - Allocation:
    - Low-growth deficit allocated predominantly at regional government level.
    - No indication provided about level and allocation of high-growth surplus.
    - Individual regional targets determined by bilateral negotiations; Ministry of Economy can set individual targets if inconsistent with overall target.
  - New law excludes some capital and other expenditures aimed at improving productivity and competitiveness.
  - Three-year corrective plans for any level of government failing to reach over-the-cycle target.
  - Enforcement relies on increased transparency, timeliness of subnational data, and explicit barring of regional government bailouts.

- Sweden
  - 1997 MTBF based on three pillars:
    1. Three-year nominal expenditure targets.
    2. 2 percent surplus on average, due to demographic considerations.
    3. Balanced local government budgets.
  - Performance: MTBF has worked fairly well but had procyclical problems and structural pressures, indicating need for comprehensive approach.
  - Nominal expenditure targets improved transparency but led to creative accounting.

- Switzerland
  - Since the 2003 budget, Switzerland has had its “debt brake” in place.
  - Objective: balanced budget over a business cycle and anticyclical fiscal policies via mechanism capping accumulation of public debt.
  - Framework has been successful with broad political and public support; pedagogic emphasis on the debt brake contributed to success.
  - Balanced budget rule included in the constitution; framework concerns only the federal government.
  - Cantons’ fiscal policies are not integrated/coordinated with federal government; cantons generally have balanced budget rules.
  - Mechanism:
    - Annual expenditure limit set to structurally balance the budget in every period.
    - Annual expenditure ceiling equals expected structural revenues, derived by applying a statistical filter to calculate the output gap.
    - After each year, deviation of actual balance outcome from the plan is calculated and kept in a fictional account.
    - Government must eliminate any negative balance in that account.
    - No time limit unless negative balance exceeds 6 percent of annual expenditures; then it must be brought down below 6 percent within three years.
    - This error-correction mechanism is the debt brake.

- The United Kingdom
  - 1998 introduction of the “golden rule” and “sustainable investment rule” as fiscal cornerstones.
  - Golden rule: over the cycle, the average current balance should be balanced or better; allows borrowing only for investments, not current expenditures.
  - Drawbacks of golden rule: uncertainty in dating the cycle and risk of procyclicality with asymmetric cycles.
  - Sustainable investment rule: net debt should be kept at a prudent level, currently defined as 40 percent of GDP at all times.
  - Accompanied by a three-year spending framework with a ceiling on spending not affected by cyclical conditions.
  - Two important features:
    - Margin of uncertainty in fiscal projections created by:
      (i) cautious assumptions;
      (ii) a buffer in the annually managed expenditures;
      (iii) setting fiscal policies such that the current budget shows a surplus;
      (iv) calculation of an alternative scenario with growth 1 percentage point lower.
    - Transparency via clear rules and official publication of cyclically adjusted fiscal indicators.

*Source: _wp08163 - 2000. The internal stability pact has also promoted consensus for consolidation across levels*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp08163.pdf_