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The views expressed in this presentation are the views of the author and do not

necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI),
the Asian Development Bank (ADB), its Board of Directors, or the governments they
represent. ADBI does not guarantee the accuracy of the data included in this paper and
accepts no responsibility for any consequences of their use. Terminology used may not
necessarily be consistent with ADB official terms.

Sub-National Debt in
OECD Countries

Asian Development Bank Institute


Tokyo, 1 December 2017

Jón Ragnar Blöndal


Head of Budgeting and Public Expenditures
Agenda

• Recent Developments of Sub-National


Government (SNG) Debt in OECD Countries

• Control Mechanisms for SNG Debt in OECD


Countries

• OECD Recommendations
Recent Developments of SNG
Debt in OECD Countries
SNG Debt Represent 13% GDP and 17% of Total
Public Debt on Average in OECD Countries

Sub-national governments
SNG Total Debt Levels Rose Sharply During the
“Great Recession”- 2007 vs. 2012.

250%

200%
% SNG income

150%

100%

50%

0%
Average Levels Mask Wide Disparities Between
SNG Within Countries

Debt as % of Income, Distribution within Countries


Potential Causes of SNG Debts Rising

• Structural Difference between the Income


Allocated to SNGs and their Spending
Obligations

• Economic Crises Can Generate a "Scissors"


Effect

• Soft Budget Constraint and Moral Hazard


Control Mechanisms of SNG
Debt in OECD Countries
Why Is it Important to Control SNG Debts?

• Externalities Between Levels of Government

• Contagion Risk

• Risks for Public Companies

• Bailout Risk for National Governments

• Limited Fiscal Capacity of SNGs


Three Manners of Control

• Control by Financial Markets


– Needs credibility; no bailouts
– Needs significant amount of information from SNGs

• Direct Control and Authorization by National


Government
– It can work – BUT only if not always granted
– Information asymmetries
– Generates implied guarantees

• Fiscal Rules
– Budget balance rule
– Expenditure ceilings
– Debt level limits
Types of Restrictions on SNG Debts

12

10
Number of countries

0
Sin
Norestricción
Restrictions Requiere autorización
Authorisation Required from Deuda extranjera
Foreign Borrowing Prohibida
All Borrowing
NationalGC
Government Prohibited
prohibida Prohibited
Types of Fiscal Rules in OECD
Countries

30

25

20
Number of countries

15

10

0
Regla
Budgetde balance
balance rules de Limitación nivel
Borrowing de deuda
constraints Techos de limits
Expenditure gastos
presupuesto
There are Different Types of
Budgetary Balance Rules
• Nominal or structural / cyclically adjusted?

• Covering current expenditure, of capital, or both?

• Off-balance funds (public enterprises) are taken


into account?

• Applied to proposed, approved or planned


budgets?

• Are there adjustment mechanisms in subsequent


years?
Coverage of Budget Balance Rules in OECD
Countries

14

12

10

0
NoNot
hay RF
used Sólobudget
Current gastoonly Gasto
Current corriente
Budget and Gasto
Currentcorriente
and Capital Gasto
Current corriente
and Capital Gasto
Currentcorriente,
and capital
corriente (regla
(Golden Rule) y off-budget
Off-budget Funds y de capital
Budget in y de Separately
Budget capital debudgets
capital andyoff-
off-
de oro) (Strong Golden Rule) Aggregate (Budget
(regla de oro agregado (regla agregado (regla Balance budget
budgetfunds
(Budget Balance Rule)
fuerte) de presupuesto de presupuesto
Rule)
balanceado) balanceado)
Key Challenges When Monitoring
SNG Debts
• Enforcement: What to do if SNGs Fail to Fulfill?

• Little Information on SNG Budgetary Practices

• Incomplete and Outdated Information on SNG Finances


and Debt Situation

• Reliability of SNG Financial Information

• SNG Financial Data Comparability

• Use of Off-Budget Funds (Local SOEs)


SNG Accounting Standards Differ
Within the Same Country

Regional entities
OECD Recommendations

17
OECD Recommendations (1)

• Fiscal rules should ensure economic stability


and sustainable budget management, but
leave enough flexibility to adapt when
exceptional situations.

• SNG capacity to provide essential public


services, and their ability to invest should be
protected

• Systems for monitoring and "early warning“


should be strengthened to avoid pro-cyclical
policies
OECD Recommendations (2)

• Accounting Standards Should be Harmonized

• Off-budget Funds and SOE Accounts Should


be Consolidated

• Existing Rules Must be Implemented Strictly in


Order to be Credible

• Rules should be Designed in Such a Way That


it is Difficult to Evade Them
OECD Journal on Budgeting

www.oecd.org/gov/budgeting

jon.blondal@oecd.org

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