The report published by the CFP on the Local Government Budget Outturn in 2022 found that there were significant deviations between the sum of the annual revenue and expenditure forecasts of municipal budgets in public accounting and their execution. The investigation into the causes of these deviations led to the preparation of this occasional publication.
When drawing up their budgets, municipalities must follow the guidelines established by the Local Finance Law (LFL) and the Official Accounting Plan for Local Authorities (POCAL), as well as following the provisions of the Accounting Standards for Public Administrations (SNC-AP) with regard to the budget statements to be presented.
The data suggests, despite improvements since 2015, possible overbudgeting practices in both revenue and expenditure that, with significant deviations in specific headings. In particular, the deviations in capital revenue stand out, especially when it comes to transfers from European funds and, on the expenditure side, acquisitions of capital goods and purchases of goods and services.
Even so, in recent years the deviations in municipal budgets have been greater on the expenditure side than on the revenue side, which has allowed the Local Government subsector to show a positive budget balance in terms of execution (413 million € in 2022), which contrasts with the public accounting deficit underlying municipal budgets (-2.1 billion €). This situation is due to the need to accommodate significant volumes of commitments made previously, combined with respect for the overall balance of budgets, a fact that has already been mentioned in other studies. From the subsector's budget outturn data, there seems to be, in overall terms, a before and after the Law on Commitments and Arrears (LCPA), which has meant that, without prejudice to the initial budget forecast, there have been no deficits (excluding 2021 with the COVID-19 impact). The restrictions imposed on implementation by the LCPA generally mean that no expenditure is incurred unless there is revenue to finance it in the same year. Some exceptions relate, in particular, to expenditure financed by EU funds, and the national counterpart, when it exists, is also subject to exceptions, namely when financed by loans.
With regard to investment expenditure (acquisition of capital goods - direct investment, but also capital transfers - indirect investment), its low outturn rate in 2022 is linked to the fact that, although expected, the revenue from European funds was much lower than expected.
It should be noted that the outturn rate for the sale of investment goods item in 2022 is significantly lower than it has been, despite the continuous repetition of the rule in the State Budget (SB) that limits its forecast. This rule, which could (or even should) be added to the POCAL rules still in force or to the Local Finance Law, should continue to be monitored. That is also the case for the incorporation of previous cash balances.
Given these deviations and the weight of commitments made in previous years, the use of public budget accounting forecasts in municipal budgets should be carried out with caution.
In addition, the budgetary accounting subsystem requires the presentation of all financial flows expected to occur in each period (receipts and payments), which is different from the perspective of financial accounting (based on the realisation of financial rights and obligations regardless of when they are received or paid - accrual principle) or management accounting (evaluation of the results of activities and projects).
The provisional financial statements (balance sheet and profit and loss account) provided for in the SNC-AP, which could allow for a better approximation of the year's implementation because they follow the same principle as financial accounting, have been exempted from the obligation to prepare them by the SB laws for local government entities. However, it is not certain that their presentation will introduce changes in the budget forecasts in public accounting, as long as the latter remains conditioned by a significant volume of commitments carried over from previous periods.
Thus, beyond the rules of forecasting, the essential problem seems to lie in the dilemma between the obligation to balance the budget as a whole and the need to assume responsibilities towards third parties assumed in previous financial years. This dilemma leads to distortions in the annual revenue forecasts needed to cover all the planned expenditure, since this also has to take into account that arising from previous commitments. In order for the budget execution forecast not to be affected by these distortions, it would be necessary for local budgets to make a de facto distinction between expenditure and revenue relating to previous periods, both in their preparation and in their presentation and disclosure. Legislation, particularly the SNC-AP, already provides the necessary tools for this to happen. It's up to the municipalities to make use of them. In addition, attention should be paid to the principle of specification (economic classification of public revenue and expenditure), avoiding the abusive use of residual headings, a situation which is not exclusive to local government, and which partly stems from a certain inadequacy of the economic classifier to the current reality.
Date of last update: 02/07/2024