This presentation was made by Aline Pennisi, Italy, at the 36th Annual Meeting of OECD Senior Budget Officials held in Rome on 11-12 June 2015.

1. Reforming the Italian budget
process: streghening the
allocation function and
integrating the spending review
36th Annual meeting of the OECD Senior Budget Officials
11-12 June 2015 / Rome, Italy

2. Revisions to the legislative and regulatory
framework
In the last four decades Italian legislation concerning public finance
and accountancy has been gradually strengthened:
• the reference text dated back to law n. 468/ 1978, later
amended by three laws: n. 362/1988, n. 94/1997 and
n.208/1999
• a major reform was made with law n. 196/2009 and part of the
subsidiary legislation delegated to Government must still be
enacted (artt. 40 and 42)
Public finance and accounting rules were next revised to adapt to the
new EU framework and to new institutional arrangements between
central and local governments, also through a constitutional
amendment and the introduction of a balanced budget
provision (constitutional law n. 1/2012 and its implementation in law
n. 243/2012)

3. The State budget is no longer a ‘formal' law and it contributes actively to
defining the overall allocation of resources, through the possibility to
introduce new taxes and new expenditures with the budget law
(previously forbidden by art. 81 of the Constitution).
A relevant part of expenditure still remains determined by parameters set
by mandatory spending laws that can not be automatically modified
through the revision of budget appropriations but require a
modification of the underlying enabling law.
Since 2009, the budget bill may contain a reallocation of ear-marked
expenditure without a modification of the original enabling law,
provided that it results in a zero-sum variation. The Parliament is informed
through a specific table.
Thanks to the constitutional amendment the budget has
already taken up a new role….

4. … but the allocation function of the budget remains
weak.
Although in recent years Italy has reinforced rules and national
institutions governing fiscal conduct, the allocation function of the
budget remains weak.
This is due:
o in part to the institutional framework,
o in part to the financial programming process,
o in part to the representativeness of the budget,
o in part to the management process.

5. During the programming phase the main focus is on the
Stability Law which only makes marginal corrections to
the Budget Bill …
Stability Laws 2010-2014: Impact on the expenditure side as a share of
general government primary expenditure (first year impact; in %)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2010
(NADEF_2009)
2011
(NADEF_2010)
2012
(NADEF_2011)
2013
(NADEF_2012)
2014
(NADEF_2013)
2015
(NADEF_2014)
Expansion Reduction Total reallocation exp.

6. … in-year decisions on budget reallocations often weight
more than the Stabilty Law
Share of expenditure variations due to the Stability Law versus all financial
laws enacted during the years 2009-2014 (in %)
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
2010 2011 2012 2013 2014 2015
Expansion (%LS/(LS+DL)) Reduction (%LS/(LS+DL)) Total reallocation exp. (LS/(DL+LS))

7. Differences between initial appropriations and end-of-
year reports are relevant …
Total in-year variation respect to initial appropriations
(final-inital/initial, in %)
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
2009 2010 2011 2012 2013 2014

8. …. and there is a reallocation of resources between
budget missions due to new expenditure laws as well as
to several types of administrative variations
Share of reallocation between missions due to mid-year budget law, in-year new
expendtiure laws, assignment of resources for arrears, ear-marked revenue, funds
and other variations made by administrations (in %)

9. The use of extra-budgetary funds has increased over the years, also to allow for
more flexilibility and to accelerate payments.
At the end of 2014, there were 2625 «special accounts» with a total of 62 bln €,
of which:
o 538 special accounts related to Ministry central offices and territorial
branches (2,1 bln €)
o 97 special accounts related to specific funds and national policies (14,5
bln €)
Part of the expenditure is managed through extra-
budgetary funds

10. Some features of the reforms under way and of the delegated legislation to be
enacted by end of December 2015 address these issues aiming at:
 A more effective financial programming process and budget law
o Unification of Stability and Budget Law
o Strengthening top-down planning
o Integrating the spending review into the budget cycle
 A more exhaustive and policy-oriented budget
o Extension of the area under the State budget control (through the
phasing out of special accounting regimes and extra-budgetary funds)
o Revision of the budget structure
 Making the budget a stronger management tool
o More focus on cash measurement
o More flexibility in managing funds for Ministries
o Stronger performance orientation of the budget
The path to overcome these weaknesses

11. Until the recent Constitutional reform, the “budget bill” was a
reflection of the amount required to fund existing legislation, while
the Government’s proposal of reallocation and innovations was made
through the Stability Law:
o starting from 2017, the Budget law (total already foreseen
amount) and Stability Law (marginal corrections) will be
presented in a unified Budget Bill in order to focus the
programming decisions on the overall amount of resources
allocated to each function/policy
o instead of verifying that new current expenditure (or revenue
reductions) introduced by the Stability law is compensated with
the new resources made available through the Stability law, the
new framework requires that the whole budget balance
is in line with the medium-term objective (MTO)
.
Towards a more effective budget law ….

12. The structure by missions and programs – being the program the
Parliamentary vote unit – is confirmed, as it is best suited to highlight the link
between the resources allocated and the objectives pursued. A particularly
innovative feature will be the introduction of actions as a breakdown of
spending programs to:
o further specify the purpose o expenditure on the basis of homogeneous
policy / functional basis
o allow greater flexibility in the use of resources during the year
o encourage administrations to advance proposals for reordering and
simplifying the underlying reference/enabling legislation and
reorganize themselves on this basis (rather than vice versa)
o a detailed chart of accounts will be adopted to provide information of
the economic nature of expenditure, but this will not be binding for the
definition of actions (only one exception: each program will have a
separate action dedicated to personnel expenditure)
… strengthening the policy-orientation of the budget
structure …

13. A better integration of the budget accounting data and those of the Treasury
and the progressive elimination of special Treasury accounts and extra-
budgetary funds (constituted thanks to resources originally in the budget) is
foreseen in the next few years:
o gradual transition through the digitalization of the payment procedures
and the integration of ordinary extra-budgetary accounts into
the budget accounting system
o suppression of special accounts and regimes and reacquisition
of their stocks to the State budget and, when this not possible, IT
development of the management of the remain special accounts
o adoption of harmonized classification scheme for the annual
reporting of the remaining off-balance sheet operations excluded from
this rationalization process
o enhancement of the IT management system (SICOGE) with the
electronic invoice, payment plan and more consistency with
monthly requirement forecasts
… as well as the integration between budget and
Treasury accounts

14. The spending review should be part of the budget
process
There have been several spending review (SR) initiatives in Italy, all on an ad
hoc basis. When measures were devised with the direct involvement of line
Ministries, they were more effective. Moreover, integration of the SR in the
budget cycle can be used to promote the reallocation of resources.
The reform aims at introducing some typical features of top-down
programming and giving Ministries three-year spending targets in terms of:
o reductions to be met, entailing a selective choice on how to
contribute the general fiscal targets
o increases to be made, on the basis of new spending initiatives that
the Government is committed to achieve (priorities).
These targets will be monitored during the year under specific “agreements” by
MoF in collaboration with each line Ministry from both a financial and results-
based approach.
Further spending initiatives should in most cases be funded by Ministries on the
basis of their own reallocation proposals, avoiding general requests to the
Government to increase total funding.

15. February/
March
April /
May
June /
August
Septembe
r (NADEF)
October/
January
Result of
monitoring of
the last three-
year
agreements
for each
administration
Report of
deviations to
Council of
Ministers
DEF (10 April)
with
macroeconomic
framework and
general govnt
expenditure rule
(UE benchmark)
Decree of the
PM setting
government
priorities and
three year
spending targets
for each Ministry
Budget
preparation
Circular
Definition of the
Ministries
proposals on how
to meet the
spending targets
through:
• Efficiency
increases
through
administrative
actions
• Legislative
proposals
MoF
coordination of
the proposals
and check of
macroeconomic
framework
the budget bill
(integrated with
Stability law)
contains the
legislative
proposals
following the
approval of the
Budget Law, the
signature of
three-year
agreements (by
January 30)
Monitoring of three-year agreements

16. Cash-flow planning is traditionally weak and contributes to several
problematic issues:
o slow payments and overdue commercial debt
o at the same time, a relevant accumulation of the budget arrears
More focus on the actual supply of public resources (cash) is sought through
the following:
o Improved cash planning on behalf of line Ministries
o the provision that managers must prepare a calendar for
payments at the moment each commitment is made
o the simplification of the regulatory framework for the control
procedures on revenue, with more attention on the collection rather
than the obligation to the tax authorities
Towards a more relevant use performance indicators
More focus on the cash-basis measures is necessary

17. Current practices have produced an overabundance of documents and data, often
connected to goals that refer to management concerns and process
aspects rather than to objectives of public policies.
Some of the major difficulties:
o many different requirements and guidelines provided to government
departments, even from different institutional bodies and for different
purposes (all referring to “performance” indicators)
o little attention for the actual measurement of results, even in the
Parliamentary debate, and scarce account on motivations for discrepancies
between observed results and target values
o Measurement is useful if it is accompanied by evaluation. Both are “costly”
activities; in some areas information systems need to be put into
place and a public policy evaluation culture needs to be spread.
Efforts are in place on the side of the MoF to produce a more public-oriented
explanation of the contents of expenditure programs and define output and
outcome indicators.
Towards a more relevant use performance indicatorsEfforts towards a stronger performance orientation
of the budget