Enacted Summary

At the time of the International Monetary Fund’s (IMF) 2002 Report on the Observance of Standards and Codes (ROSC) - Fiscal Transparency Module, Italy met the standards of the IMF’s Code of Good Practices on Fiscal Transparency in many respects. However, the ROSC fell short of explicitly assigning levels of compliance for Italy against the Code. Furthermore, a 2006 assessment by the IMF described Italy’s budget process as "tortuous and non-transparent" with insufficient accountability regarding results. Similarly, a 2008 IMF report labeled it as “fragmented, time-consuming, and legalistic" and lacking transparency and result-orientation. Despite Italy’s problematic current budget process, however, the country does adhere to most legal criteria of the Code. According to the 2002 IMF report, the Italian Constitution and the European System of Accounts of 1995 define the roles and responsibilities of general government and clearly set Italy's main government sectors apart from the private sector. The 1978 Accounting Law, along with its subsequent amendments, defined and formalized budget and financial management. This law was updated with a new public finance and accounting law, which came into effect in January 2010. The IMF reported some progress in its 2003 and 2006 ROSC - Fiscal Transparency Module Updates, especially towards strengthening the integrity of data. Also, in October 2005, Italy launched SIOPE, a computerized recording system of cash transactions of all public entities which has augmented the monitoring of developments in local pubic finances. The IMF in its 2008 Article IV Consultation report highlights significant progress in streamlining its budget process and improving public administration productivity. Specifically, a 2009-2013 medium-term plan with binding measures and costs broken down by missions and programs was passed into law. Despite these improvements, notes the 2008 report, the pace of progress in Italian fiscal transparency remains sluggish.

General Overview

Despite not explicitly assigning any levels of compliance, the 2002 International Monetary Fund’s (IMF) Report on the Observance of Standards and Codes (ROSC) - Fiscal Transparency Module states that Italy meets the standards of the IMF’s Code of Good Practices on Fiscal Transparency in many respects. In particular, the Italian Constitution and the European System of Accounts of 1995 (ESA 95) define the roles and responsibilities of general government and clearly set Italy's main government sectors apart from the private sector. The 1978 Accounting Law, along with its subsequent amendments, defined and formalized budget and financial management. However, this law was replaced by a new public finance and accounting law, which came into effect in January 2010, according to a report by Italy’s Ministry of Economy and Finance (MEF). Mechanisms for the coordination and management of budgeted and extra-budgetary activities are well defined. Legislative basis for taxation, regulation, and administrative procedures are clear. The general government is also defined by Legislative Decree No. 165 issued in 2001. Under ESA 95, the National Institute of Statistics (Istituto Nazionale di Statistica, or ISTAT) is responsible for the compilation of general account statistics in Italy.

In its 2006 ROSC - Fiscal Transparency Module Update, the IMF notes that regarding public availability of information, "progress is needed to allow a firmer assessment of Italy's fiscal developments and prospects" (p. 3). Nevertheless, through Law No. 468 of 1978 (subsequently replaced by Law No. 196 of 2009), Italy has in place the legal requirements for regular publication of fiscal data. Italy is a subscriber to the IMF’s Special Data Dissemination Standard (SDDS) and meets all SDDS specifications for coverage, periodicity, and timeliness of data. In addition, Italy provides advance release calendars for all relevant categories of data. The 2006 ROSC Update also made several recommendations regarding the public availability of information. For example, the IMF advised that Italy enhance the transparency and timeliness of its budget documents. The current practice is that important information framing budgetary plans have traditionally been released only long after the draft budget itself, thus impeding meaningful assessment of fiscal plans.

The 2002 IMF’s ROSC states that "the major stages of the annual budget preparation process are clear" (p. 19), and that the "budget presentation focuses on legal compliance and the core budget classification is bridged to support reporting, which meets international standards" (p. 20). A statement on medium-term fiscal policy objectives and budget forecasts is clearly presented in the budget documents. So are underlying macroeconomic assumptions and estimates of new initiatives and ongoing costs of government legislation. In addition, the budget documents traditionally contain some analysis of sensitivities to economic variables, as is required by the European Union (EU). However, according to the 2006 ROSC Update, the IMF recommended in 2002 that Italian authorities "make the budget law the sole authority for expenditures in the fiscal year; reduce carry-forwards from previous budgetary allocations; increase the focus of budget execution on efficient resource allocation rather than on legal compliance only; and complete the 1997 Ciampi reform by developing responsibility and accountability lines" (p. 2).

Since these recommendations, Italy has completed the final conversion of Decree No. 194 of 2002 with some amendments into Law No. 246 of 2002 (henceforth the Budget Law). The new Budget Law also addressed several other weaknesses in Italy's budget management and execution regime. For instance, the Law eliminates the carry-forward of uncommitted funds to future fiscal years and reduces to one year the chances of carry-forward of allocations committed in previous budgets. Also, to promote responsibility and efficient resource allocation, new spending laws have instituted annual ceilings, and these laws require a supplementary parliamentary approval to exceed budget appropriations. Furthermore, the State General Accounting Office (RGS) is now required to report when spending reaches the budget appropriations threshold. According to the 2003 ROSC Update, "if fiscal outcomes indicate that the approved budget targets will be exceeded, the law authorizes the government to impose across-the-board cuts to approved appropriations, by issuing a decree" (p. 2).

According to the 2002 IMF’s ROSC, fiscal information in Italy is subject to independent scrutiny. Established by the Constitution (Article 100), the fully independent Corte dei Conti is entrusted with the responsibility for conducting ex post audit of financial operations of the general government. The court, which reports directly to Parliament, also conducts special audits of selected government activities. All audit reports are publicly available and the Court may freely convey its opinion in public. The National Institute of Statistics (Istituto Nazionale di Statistica, or ISTAT), which is independent by virtue of Legislative Decree No. 322of 1989, manages Italy's national statistics system.

In its 2002 ROSC, the IMF recommended that Italian authorities conduct a full reconciliation between above-the-line and below-the-line cash accounts both at the central and at the general government level. In its 2006 ROSC Update, the IMF stated that Italy had made some major developments on this issue since the original ROSC in 2002, noting that the Italian government had made considerable progress in narrowing the longstanding discrepancy between the two main measures of the fiscal balance (above-the-line and below-the-line fiscal data). This development had the expected outcome of boosting the quality and integrity of data. Also, in October 2005, Italy launched SIOPE, a computerized recording system of cash transactions of all public entities. An IMF’s 2008 Article IV Consultation report lauds SIOPE for its success, stating that the system now tracks 98 percent of all public expenditures.

Regarding the transparency of Italy's budget presentation and approval process, a 2006 IMF’s Article IV Consultation observes that Italy has made significant progress only on narrowing the historically large stock-flow discrepancy, adding that Italy's budget process is still "tortuous and non-transparent, with little accountability for results" (p. 15). Also, given Italy's aging population and high public debt, the IMF has long warned that Italy adopt credible medium-term fiscal consolidation for longer-term sustainability to be achieved. The 2006 Article IV Consultation reports that, while a near-term deficit reduction is underway in Italy, a medium-term effort is lacking. Furthermore, the 2006 report listed several challenges facing Italy's fiscal policy regime and suggested recommendations to overcome them. For instance, to reach overall balance by 2010, the IMF recommends that Italy adopt a credible medium-term consolidation plan, replete with targeted measures to rein in spending. In response, the Italian authorities created a new Domestic Stability Pact, "which replaces expenditure ceilings with explicit deficit targets, and grants local authorities greater taxing leeway, while cutting state transfers" (p. 16). The IMF also recommended that Italy reform its pension system as a way to lessen long-term spending pressures associated with an aging population. Per the same report, in September 2006, the Italian central government signed a new "health pact" with the five regions, which created "multiyear financing envelopes to increase budgetary certainty, and undertaking various cost-saving initiatives" (p. 16-17). Regions that violate the new pact will be subject to increases in some regional tax rates.

The IMF’s 2008 Article IV Consultation report comments on developments following these recommendations. The report states that Italy has managed to somewhat streamline its budget process and improve its medium-term framework, but that progress has been slow overall. The 2008 report describes Italy’s overall budget process as still being “fragmented, time-consuming, and legalistic, while lacking transparency and result-orientation,” (p. 40) and urges further significant reforms. Also complicating matters and delaying reform, according to the same report, is Italy’s use of extensive fiscal measures to counteract the effects of the global financial crisis.

The Principles

IIClarity of roles and responsibilities.

According to the 2002 IMF’s ROSC - Fiscal Transparency Module, Italy meets the standards of the IMF’s Code of Good Practices on Fiscal Transparency in many respects. However, the assessment does not specifically assign a level of compliance for this principle. The ROSC states that, in terms of the structure and functions of government, the Italian Constitution and ESA 95 define the roles and responsibilities of general government and clearly set Italy's main government sectors apart from the private sector. The relative roles of the executive, legislative, and judicial branches are clearly defined in the Constitution. The 1978 Accounting Law, defined and formalized budget and financial management. However, this law was replaced by a new public finance and accounting law, which came into effect in January 2010, according to a report of the same month by Italy’s Ministry of Economy and Finance (MEF). Mechanisms for the coordination and management of budgetary and extra-budgetary activities are well defined. The legislative basis for taxation, regulation, and administrative procedures is clear. The general government is also defined by Legislative Decree No. 165 issued in 2001. For example, under ESA 95, the ISTAT is responsible for the compilation of general account statistics in Italy. In consultation with the Bank of Italy and the MEF, ISTAT establishes, maintains and updates annually a list of all general government entities. The general government is divided into the central and local administrations, and social security institutions, as indicated in ISTAT publications.

The 2002 ROSC emphasized the need for Italy to institute 1) inter-governmental mechanisms to better coordinate budgetary policies and management; 2) clear and effective sanctions in the event of non-compliance by local governments with agreed fiscal targets; and 3) timely and reliable mechanisms to monitor developments in local public finances, which in turn would require adopting common accounting rules across levels of government to ensure compatibility with general government policy objectives. The 2006 Fiscal Transparency Module Update to the 2002 ROSC, while addressing progress in certain areas, it made no mention of Italy’s developments related to this principle.

IIOpen budget processes

According to the 2002 IMF’s ROSC, "the major stages of the annual budget preparation process are clear" (p. 19), and the "budget presentation focuses on legal compliance and the core budget classification is bridged to support reporting which meets international standards" (p. 20). However, the assessment does not specifically assign a level of compliance for this principle. A statement on medium-term fiscal policy objectives and budget forecasts is clearly presented in the budget documents. So are underlying macroeconomic assumptions and estimates of new initiatives and ongoing costs of government legislation. In addition, the budget documents traditionally contain some analysis of sensitivities to economic variables, as is required by the EU. Furthermore, according to the IMF report, budget preparation in Italy "has an incremental and legal compliance focus" (p. 23), adding that the RGS sends a budget preparation circular, replete with detailed guidelines for discretionary categories of expenditure, to line ministries during budget preparations (IMF 2002).

However, the 2002 ROSC cited several shortcomings. For instance, the objectives of major programs are not specified in detail in budget documents and actual progress is not reported against these objectives. Also, the ROSC states that the budget approval process, although clearly defined in law, is complex. Finally, many new policy initiatives are authorized outside the regular budget cycle, thereby reducing the meaningfulness of the budget as an instrument of resource allocation.

In its 2006 ROSC Update, the IMF noted that in 2002 it had recommended that Italian authorities "make the budget law the sole authority for expenditures in the fiscal year; reduce carry-forwards from previous budgetary allocations; increase the focus of budget execution on efficient resource allocation rather than on legal compliance only; and complete the 1997 Ciampi reform by developing responsibility and accountability lines" (p. 2). Since these recommendations were made, Italy has completed the final conversion of Decree No. 194 of 2002 with some amendments into the new Budget Law No. 246 of 2002. The new Budget Law also addresses several other weaknesses in Italy's budget management and execution regime. For instance, the Law eliminates the carry-forward of uncommitted funds to future fiscal years and reduces to one year the chances of carry-forward of allocations committed in previous budgets. Also, to promote responsibility and efficient resource allocation, new spending laws have instituted annual ceilings, and these laws require a supplementary parliamentary approval to exceed budget appropriations. Furthermore, the RGS is now required to report when spending reaches the budget appropriations threshold. According to the 2003 ROSC Update, "if fiscal outcomes indicate that the approved budget targets will be exceeded, the law authorizes the government to impose across-the-board cuts to approved appropriations, by issuing a decree" (p. 2).

Regarding the transparency of Italy's budget presentation and approval process, the 2006 Article IV Consultation report observes that Italy has made significant progress only on narrowing the historically large stock-flow discrepancy, adding that Italy's budget process is still "tortuous and non-transparent, with little accountability for results" (p. 15). Also, given Italy's aging population and high public debt, the IMF has long warned Italy to adopt credible medium-term fiscal consolidation for longer-term sustainability to be achieved. The report also mentions that, while a near-term deficit reduction is underway in Italy, a medium-term effort is lacking. However, the IMF’s 2008 Article IV Consultation notes progress in this area, stating that “the government should continue to steadfastly improve fiscal frameworks to underpin the medium-term expenditure-based fiscal consolidation” (p. 4). The report highlights “significant progress” by Italy in streamlining its budget process and improving public administration productivity. Specifically, a 2009-2013 medium-term plan with binding measures and costs broken down by missions and programs was passed into law. The same report urges Italy to continue its reforms and to begin tackling longer-term fiscal problems such as the welfare system. Nevertheless, the overall assessment of Italy’s budget process by the 2008 Article IV report is still poor, with the IMF describing it as “fragmented, time-consuming, and legalistic, while lacking transparency and result-orientation” (p. 40).

IIPublic availability of information.

The 2002 IMF’s ROSC concluded that Italy’s budget documents focused on the operations of the state and provided only partial and fairly aggregate information on the rest of general government. Furthermore, the publication of information on sub-national activities was still limited by the availability of timely and reliable information. Also, as of 2002, a major shortcoming was that budget documents did not contain a statement of fiscal risks; neither did they contain a systematic presentation of tax expenditures. As a result, the IMF's main recommendations from 2002, according to the 2006 ROSC Update, focused on improving the quality of fiscal data and information by "broadening the coverage of the general government in published documentation and producing reports for the general government outturn on a quarterly basis; including an assessment of the magnitude of tax expenditure; listing guarantees provided by government entities; providing more information on financial transactions between the government and public enterprises; and increasing published information on larger non-state entities where the state is a shareholder" (p. 1).

In the 2006 ROSC Update, the IMF notes that regarding public availability of information, "progress is needed to allow a firmer assessment of Italy's fiscal developments and prospects" (p. 3). However, the assessment does not specifically address Italy's compliance with this principle. Italy has a plethora of publications (issued by various institutions) that report fiscal developments and aggregates, even if they differ on coverage and accounting criteria. Through Law No. 468 of 1978, Italy had in place the legal requirements for regular publication of fiscal data. However, this law was replaced by a new public finance and accounting law, which came into effect in January 2010, according to a report by Italy’s MEF. Italy provides advance release calendars for all relevant data. Information on gross public debt and financial assets, such as the level and composition of general government debt, is published regularly. The Public Debt Management Department publishes (on a quarterly basis) data on central government debt on its website, and these numbers are also part of the data sent to the IMF's SDDS website. In addition to publishing financial flows (i.e. accrual adjustments and stocks valued at market value), the Bank of Italy (BoI) also publishes data on the financing of the borrowing requirement and on gross debt, and ISTAT presents the data according to the ESA 95 framework. Since October 2003, ISTAT has published quarterly accrual-based accounts for the general government, with a three-month lag.

The 2006 ROSC Update also made several recommendations regarding the public availability of information. For example, the IMF urged Italy to enhance the transparency and timeliness of its budget documents. The current practice is that important information framing budgetary plans have traditionally been released only long after the draft budget itself, thus impeding meaningful assessment of fiscal plans. Also, despite considerable progress recorded recently in narrowing the longstanding discrepancy between above-the-line and below-the-line fiscal data, the IMF recommends that Italy provide more information on financial transactions between the government and public enterprises to further address the aforementioned discrepancies in fiscal balances. Additionally, the IMF advised that Italy address the general lack of data on the operations of larger non-state entities where the state is a shareholder. Finally, according to the 2006 ROSC Update, "as public private partnerships gain ground from the current low base, these operations and associated contingent liabilities should be transparently recorded, including in budget documentation; and project evaluation should be strengthened across all levels of government" (p. 3).

IIIndependent assurances of integrity.

According to the 2002 IMF’s ROSC, fiscal information in Italy is subject to independent scrutiny. However, the assessment did not specifically assign a level of compliance for this principle. Established by the Constitution (Article 100), the fully independent Corte dei Conti is entrusted with the responsibility for conducting ex post audits of financial operations of the general government. The court, which reports directly to the parliament, also conducts special audits of selected government activities. All audit reports are publicly available and the court may freely convey its opinion in public. Nevertheless, while Italy has legal provisions requiring audited agencies to report to the court on remedial action taken in response to audit findings, there are no legal requirements of parliament to review audit reports and, most importantly, initiate appropriate legislative action for compliance by the administration. ISTAT, which is independent by virtue of Legislative Decree No. 322 of 1989, manages Italy's national statistics system.

However, in its 2006 ROSC Update, the IMF noted that Italy has made some major progress since the original ROSC in 2002, particularly regarding the strengthening of data integrity. For example, the Italian government has made considerable progress in narrowing the longstanding discrepancy between the two main measures of the fiscal balance (above-the-line and below-the-line fiscal data). This development has had the expected outcome of boosting the quality of data and budget reporting. Also, in October 2005, Italy launched SIOPE, a computerized recording system of cash transactions of all public entities. Since SIOPE is based on a standardized classification of the same groups of entities (i.e. states, regions, municipalities and provinces), it will provide real-time information on all cash operations and subsequently contribute to the monitoring of developments in local-pubic finances. Indeed, the IMF’s 2008 Article IV Consultation report notes that this system is “starting to bear fruit” (p. 43), and that it now tracks 98 percent of public expenditures.