EUROPEAN COMMISSION DIRECTORATE GENERAL ECONOMIC AND FINANCIAL AFFAIRS

Brussels, 29 August 2019

QUALITY OF PUBLIC FINANCES:

Spending reviews as a key tool to enhance public investment in the Euro Area

Technical note to the Eurogroup

Ref. Ares(2019)5463946 - 29/08/2019

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Spending reviews as a key tool to enhance public investment in the Euro Area

1. Introduction

A discussion on ways to enhance the efficiency of public investment is relevant for the

Euro Area, as this is crucial to boost innovation, competitiveness and convergence in a

context of overall limited fiscal space and high investment needs.1 The 2019 Council

recommendations on the economic policy in the Euro Area emphasise the importance of

investment – both public and private – in the context of effective and efficient public

expenditure. This year’s focus on investment in the European Semester highlights investment

priorities with highest macroeconomic return to create a stronger link between the European

Semester and the EU Cohesion Policy Funds.2 Finally, in June 2019, the Eurogroup agreed on

the main features of the Budgetary Instrument for Convergence and Competitiveness (BICC)

for the euro area3, which aims at promoting structural reforms and investment.

As a crucial tool for ‘smarter’ expenditure, spending reviews can be instrumental in

fostering public investment, including investment for climate neutrality. Spending

reviews are increasingly being used in the Euro Area to improve the quality of public

finances, more specifically the expenditure allocation, as encouraged by the dedicated 2016

Eurogroup common principles.4 Among others, spending reviews are a fitting tool to boost

high-quality public spending, in line with the 2017 Eurogroup common principles for

investment.5 First, these reviews are crucial given their focus on spending reprioritisation,

which could help make room for public investment, including notably ‘green’ investment,

while maintaining fiscal sustainability. Second, spending reviews can increase the efficiency

of public investment as the scrutiny process of the review also allows for improving the value

for money of investment projects. Finally, as spending reviews often entail an overhaul and

restructuring of budgetary and policymaking processes, including closer coordination within

the public administration, they can also have a beneficial impact on the modalities of

managing public investment.

This note provides some reflections on how spending reviews can boost high-quality

public spending. Section 2 discusses public investment in the euro area while Section 3

provides some evidence on spending reviews, including those targeting investment items.

Section 4 points to features of investment that need to be taken into account when conducting

a spending review. The note concludes with proposed ways forward and tentative issues to

frame the Ministers’ discussion at the 13 September Eurogroup meeting.

1 https://ec.europa.eu/info/sites/info/files/economy-finance/swd-2017-660_en.pdf 2 https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52019DC0500&from=EN 3 https://www.consilium.europa.eu/en/press/press-releases/2019/06/14/term-sheet-on-the-budgetary-instrument-

for-convergence-and-competitiveness/pdf 4 https://www.consilium.europa.eu/en/press/press-releases/2016/09/09/eurogroup-statement/ 5 https://www.consilium.europa.eu/it/press/press-releases/2017/04/07/eurogroup-statement-investment/

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2. Investment challenges in the Euro Area

Performance of public investment in the Euro Area still shows signs of weakness. While

growth rates in most Euro Area Member States have recovered to pre-crisis levels, private and

public investment remains subdued, with its contribution to growth still below pre-crisis

levels (Graph 1).6 In addition to low levels of gross fixed capital formation, Euro Area

governments display low levels of net fixed capital formation, i.e. the capital stock net of the

depreciation of the existing capital stock, especially if compared with the US and the EU as a

whole.7

Graph 1: Contributions to growth in the Euro Area Graph 2: Net fixed capital formation (public sector)

Source: Ameco data

In April 2017, pointing to the Euro Area’s specific interest in addressing barriers to

investment, the Eurogroup issued three common principles on investment, as follows:

(i) Reforms should aim at facilitating resource reallocation and, in particular: (a)

improve the business environment; (b) improve the quality of public administration,

(c) address sector-specific bottlenecks and (d) improve the responsiveness of the

labour market;

(ii) high-quality public investment should be prioritized to boost growth in both short run

and medium-long run;

(iii) market-based sources of business financing should be developed.

Scaling-up of public investment in the Euro Area should be done while ensuring

compliance with the SGP. As regards the second principle on high-quality public

investment, the Eurogroup underlined the need for these efforts to comply with fiscal

sustainability objectives. For Member States with limited fiscal space, this would require

6 Comparison with pre-crisis levels of investment should, however, be taken with caution due to construction

booms that occurred in some Member States, which only temporarily boosted the investment contribution to

growth during that period. 7 https://www.ies.be/policy-brief/case-public-investment-eu

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improving the composition of public finances to create room for more investment. Evidence

shows that for countries with high debt the need for reprioritisation is indeed higher, as a large

part of their debt has been financing items other than capital spending (Graph 3).8

Graph 3: Net debt and capital stock (% of GDP)

Note: Net public debt is computed as gross debt net of financial assets held by the general government

sector in currencies and deposits, loans and debt securities. The source of data on general government

capital stock is Eurostat.

Source: European Commission

3. Spending reviews in the Euro Area

A 2019 Commission survey confirms that in the Euro Area spending reviews are used

more than before as an instrument for improving the quality of public finances.

Following the 2018 thematic discussion on spending reviews, the Eurogroup committed to a

new discussion in 2019, based on new survey data to be collected by the Commission. A

survey was thus conducted in April-May 2019, which gathered information about 46 spending

reviews (against 30 reviews reported in the first survey in 2017). A map and a table with the

recently completed, ongoing and planned reviews reported in the 2019 survey are included in

Annex 1. Compared to 2017, the new survey points to a larger use of spending reviews,

8 Graph 3 presents the relationship between the existing stock of net debt (i.e. gross debt net of liquid assets) and

the capital stock of the general government. The main intuition behind the graph is that when net debt is lower

than the capital stock, it could be considered that net debt increased to fully finance public investment.

Conversely, when net debt is higher than the capital stock, the exceeding part of net debt has not been used to

finance public investment.

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which, in some cases, are conducted as part of regular or multiannual processes. As several

spending reviews have been completed in the meantime, or are approaching the

implementation phase, more observations could be made about the ensuing reform options

than in 2017.

The survey points to some positive developments as regards adherence to the Eurogroup

common principles for spending reviews (see Annex 2 for a summary table on the

conclusions on adherence to common principles for the spending reviews surveyed in 2019).

In particular, a stronger political commitment than in 2017 is reported at the design and

conduct phases (Graph 4). New forms of institutional coordination are being developed, with

larger use of a permanent coordination unit or task force than in 2017, suggesting the build-up

of more adequate skills and resources to conduct the reviews. Furthermore, the

administrations under review appear to be generally more involved than in the past, and their

ownership of the review process is reported to have increased. Finally, the production of

diagnoses tends to rely more on comprehensive analyses whereas more reform options are

being developed, with a higher attention than in the past towards outcomes and performance.

Graph 4: Commitment to spending reviews

Source: 2019 Commission survey of euro area Member States

Challenges remain, especially in the implementation and monitoring phases. The survey

reveals room for improvement in attaining some of the objectives laid down in the common

principles. For example, only in rare cases quantitative targets are set ex-ante in the review

mandate. Pilots and fact-based analyses for the diagnosis are sporadically used. As regards the

implementation of reform options, political commitment is reportedly lower than in the past

and the development of implementation roadmaps appears to be still limited. There is also

room for improvement in the monitoring and evaluation phases. Finally, only a minority of

euro area Member States report incorporating decisions from spending reviews into their

budget planning. As regards main reported challenges, lack of data, insufficient ownership

0%

20%

40%

60%

80%

100%

Design Conduct Implementation Monitoring Ex-post

evaluation

Evolution of the strength of the committment, % reviews

Strong Limited Not sure Not started

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from entities scrutinized and lack of staff feature as top challenges (Graph 5), while fewer

respondents than in 2017 pointed to the ownership of the administration scrutinised as

insufficient.

Graph 5: Main challenges for spending reviews

Source: 2019 Commission survey of euro area Member States

Evidence on spending reviews conducted purposefully to enhance the efficiency of public

investment is scarce in the Euro Area. Only Ireland seems to have conducted so far a

comprehensive revision of its capital stock, through the 2016-2021 Capital Plan Review.

Based on submissions from Ministries and stakeholders, this review identifies priorities for

future capital spending. The exercise has also been supported by an assessment of the Irish

Government Economic and Evaluation Service on the adequacy of the current capital stock.

Still, a few Member States are conducting targeted reviews on some capital items. For

example, in 2016 Slovakia launched a review of its transport infrastructure, which identified a

series of shortcomings in the sector, including lack and inaccuracy of data, poor conditions for

roads and railways and lack of coherence among different modes of transport. The review

recommended to enhance project evaluation, through better data gathering and disclosure as

well as through cost-benefit analyses that quantify impacts on mobility, environment and

public health. Outside the Euro Area, the UK has notably conducted a review of intangible

assets (property, software, data, technological expertise, organisational know-how) as part of

its Balance Sheet Review launched in 2017; after unveiling the scale and variety of

knowledge assets held by the public sector, that review proposed innovative ways for

managing them and enhancing their returns.

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Lack of data Insufficient

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from entities

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Lack of

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No or

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and decisions

from the

political level

Insufficient

cooperation

from entities

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Lack of

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Main challenges, % reviews

2019 2017

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4. Features of public investment to be considered in spending reviews

Reviewing public investment should invariably start from the ultimate objectives those

investments are to fulfil. Investment programmes are usually driven by broader and more

ambitious goals than current spending, encompassing for example higher potential growth,

environmental or social goals such as reducing long-term unemployment. When goals are

broad, the link between investment decisions and specific policy objectives can be loose and,

with long implementation times, it can become weaker over time, thus reducing the relevance

of the investment. It is therefore highly advisable to clearly define from the outset the purpose

of the investment whose relevance and usefulness would be subsequently assessed through

spending reviews.

From a budgetary perspective, alignment of public investment programmes with the

medium-term budgetary framework is important and should therefore be a core

element of the spending review. A key criterion for pursuing a programme/project must be

that the related investments are part of the government’s medium-term strategy and are

factored into the budgetary planning. Coherence between the programmes’ objectives and the

medium-term strategy would provide the former better protection throughout their design and

execution. This should also be reflected in a better integration of spending review outcomes in

the annual budgetary process.

Some specific features of investment matter when conducting spending reviews to assess

the efficiency or value for money of public investment.9 First, as capital spending relates to

changes in assets, an examination of the stocks is warranted. Differently from current

spending, investment relates to both stocks and flows. Looking at stocks raises additional

issues than those commonly examined for current spending, including ownership,

maintenance and depreciation of the stock. Second, investment has a time dimension, as it

usually spans over a multi-annual horizon. An investment programme/project typically entails

several phases: planning, implementation or execution, and evaluation. The focus of a review

tends to change along these phases. While the bulk of financing decisions are taken at the

planning phase, many changes also occur during implementation, with the financing being

possibly increased or reduced, and at times some projects that are part of the programme

could even be abandoned. Finally, investment yields economic and social returns in the

medium to the long-run. As these returns as well as the entire project execution entail some

risks, performance budgeting should be extended to include an assessment of returns and

risks.

9 Public investment is expressed by gross fixed capital formation, namely government’s acquisitions, less

disposal, of tangible and non-tangible assets. Tangible assets include dwellings, other buildings and structures,

machinery and equipment, and cultivated biological resources. Intangible assets comprise instead R&D,

computer software and databases, intellectual property rights, entertainment and literary originals. Its

expenditure category counterpart is capital expenditure, and more precisely investment expenditure, which

includes gross capital formation, plus acquisitions less disposals of non-produced non-financial assets.

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5. Possible way forward

The recourse to spending reviews has been on the rise in the Euro Area, with many

reviews having undergone or currently going through the crucial phase of implementation of

reform options. At the same time, the take-up of the common principles adopted by the

Eurogroup is still quite limited overall and thus further efforts should be undertaken by the

euro area Member States to integrate more substantially those principles in the design,

conduct and implementation of ongoing and future spending reviews.

Under these circumstances, there is ample scope for follow-up work, in accordance with

the mandate granted by the Eurogroup in September 2016. The Eurogroup and the

preparatory committees can contribute to further promoting the use of spending reviews in the

Euro Area and the adherence to the established common principles. As emerged from

previous thematic discussions, there is clearly high interest among euro area Member States to

continue the exchange of best practices and lessons learned as a way to increase awareness of

benefits and pitfalls and enhance the performance of reviews.

In terms of spending review topics that could be explored in a thematic discussion during

2020, the 2019 survey suggests that further analysis and discussion drawing on Member

States’ experiences would be warranted with respect to (i) overcoming bottlenecks in the

implementation phase of spending reviews, and (ii) ways to ensure better consistency between

the annual and multiannual budgetary plans and the spending review process. Alignment of

spending reviews with multiannual budgets would be particularly relevant in the case of

reviews of capital spending, given the long-term dimension of public investment.

The public investment dimension of spending reviews would also deserve further work.

This could notably include a wider exchange of experience among euro area Member States

with respect to investment-oriented reviews. It would also be useful to develop some elements

of guidance for conducting such reviews, without seeking to constrain national investment

choices and with due consideration to the non-negligible methodological challenges of

assessing the broader impacts of investment. In this respect, spending reviews could be an

opportunity to enlarge governments’ knowledge on their assets, as these represent a large

unknown in public accounting (intangible assets are a good case in point, as illustrated in this

note).

Spending reviews for investment can be useful to complement efforts to enhance Euro

Area’s convergence & competitiveness and pursue other priority objectives, such as

promoting a ‘green economy’. As discussed, an investment focus for spending reviews

requires a clear definition of objectives and goals to be attained at the national level. The

assessment of investment spending vis-à-vis these objectives could then follow the strategic

orientations on the reform and investment priorities that would be produced in the BICC

context. Another dimension to be considered with priority in the scrutiny of public investment

could be related to climate neutrality and environmental transition. By making room for green

investment and/or enhancing the efficiency of such investment, spending reviews can indeed

be instrumental towards a climate neutral and environmentally sustainable economy.

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The Commission stands ready to provide support to further follow-up work, including

through the regular collection of information, identification of trends and best practices, in-

depth analysis in the light of common principles, and development of guidance. Moreover, it

is worth recalling that the Commission Structural Reform Support Service (SRSS) already

facilitates support to spending review processes in several euro area Member States by

bringing in expertise; further support can be provided via the Structural Reform Support

Programme (SRSP).

Issues for discussion

Do Ministers agree with the considerations on the use of spending reviews to support

public investment? Are there other significant aspects to take into account?

Is there any other specific investment-related element that should be considered for

the design and conduct of spending reviews?

Do Ministers agree on the usefulness of developing guidance on how to conduct a

spending review for investment items? If so, what elements should be addressed with

priority?

How do Ministers appreciate the present level of adherence to the Eurogroup common

principles for spending reviews? How can this be improved?

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Annex 1: Spending reviews in the Euro Area (2019 Commission survey)

Completed Ongoing Planned

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Annex 2: Main results of the 2019 survey in terms of adherence to the Eurogroup

common principles for spending reviews

Commitment

Design and implementation

(ii) the use of pilots to build expertise (ii) Pilots have been used in very few instances.

Monitoring and communication

Consistency with budget planning

The ambition and conclusions of a spending review should be

consistent with annual and multiannual budget planning. The

national fiscal framework should include the principle of

running regular spending reviews to inform budget making

•        Only three Member States have a legal requirement 

to integrate the conduct of a spending review in the

budget process and to include the outcome in the next

year budget.•        Only a minority of euro area countries report 

incorporating decisions from spending reviews into their

budget planning.

(iii) the provision of adequate resources and access to data(iii) Access to data and resources remains limited and is

seemingly a more important challenge than in 2017.

(iv) the use of guidelines for consistency in producing diagnosis,

baselines, reform options and implementation roadmaps

(iv) Diagnoses are based on more comprehensive

analyses, reform options are increasingly being

developed, but implementation roadmaps are still left

aside.

(v) the use of fact-based analysis linking spending across

budget and administrative structures to policy outcomes

(v) The use of fact-based analyses seems to be still

limited, yet attention to citizens’ satisfaction has 

increased as far as reform options are concerned.

Common principle Survey results

Monitoring and communication to the public on the progress

and outcome of reviews should be regular and transparent.

Spending reviews themselves should be subject to

independent ex-post evaluation to learn lessons for future

reviews

•        Monitoring appears to be limited in the conduct 

phase and focused mostly on processes; it is more regular

in the implementation phase.

•        Ex-post evaluation is available only for three 

Member States at this stage, and rarely made public.

•        More than half of the reviews are covered by the 

media. Coverage has occurred at least once a year,

reporting mostly on reform decisions.

Strong and sustained commitment at high national level,

throughout the project, is essential for successfully carrying

out spending reviews and implementing their findings into

meaningful reforms

•       Political commitment is stronger than in 2017, 

although weaker compared to 2017 during

implementation.

•       Commitments are usually conveyed in a formal 

strategic mandate but with limited communication to the

public.

•       Only in a few Member States, legal provisions and 

procedural practices sustain the commitment to the

spending review.

The design and implementation of spending reviews should

follow best practices that include:

(i) a clear strategic mandate specifying the objectives

(potentially including quantified targets) the scope and a

centre of coordination

(i) For about a third of the reviews, some key elements of

the strategic mandate are missing and/or the mandate is

not made public. Quantified targets in the mandates are

an exception.