The new EU rules on public accounts. Adjustment of 0.5% when the deficit exceeds 3% of GDP. Dombrovskis: “States will no longer be able to postpone it”

The European Commission has launched its proposal for the awaited revision of the Stability and Growth Pact, the set of Community rules on public finance. Proposals which, says the EU Commissioner for the Economy, Paul Gentiloni, “promote greater national ownership through medium-term fiscal structural plans prepared by member states”. By ensuring “simultaneously equal treatment and consideration of the specific situations of individual countries”, the rules will allow “more credible application” by giving “the member states greater room for maneuver in defining budget trajectories”. According to the Vice-President of the Commission, Valdis Dombrovskis, now “states will no longer be able to postpone budget adjustments” and “there will be no more excuses”. The Commission’s proposal will be on the table of the Eurogroup in the next few days and the declared objective is to close the legislative work by the end of the year, triggering the rules from January 2024. “I am confident that we will be able to achieve this objective”, says Gentiloni: “And ‘ in the interest of all member states. It would reassure financial markets and investors. It would give governments clarity on the way forward, also considering the deactivation of the ‘general escape clause’ at the end of this year”.

The plans of the member countries and the EU priorities

According to Brussels, the entire proposal is based on medium-term national financial planning. The plans of the member countries will have a four-year horizon to outline budget targets, investment measures and reforms on the agenda. This rewards the so-called “national ownership” in the definition of budget plans.

Together with this point, four other aspects are also focal: simpler and more transparent references, with paths of fiscal consolidation formulated in terms of multi-year spending objectives that ensure the reduction of public debt and the maintenance of deficits below 3% of the GDP; more gradual fiscal adjustment paths if accompanied by “credible” reforms and investment commitments that promote sustainable and inclusive growth in line with EU priorities; greater reliance on “infringement” procedures and “common guarantees” as a counterpart to the greater leeway available to governments to set their own fiscal adjustment paths; new common minimum standards for independence and tasks for independent national fiscal institutions. All with the aim of leaving room for investments, without any “golden rule” for some particular expenditure items (such as green or digital) but taking these items into consideration in defining the sustainable debt trajectory.

The rules for Italy and the compromise for Berlin

For Italy, the news expected on the eve are confirmed: the maneuvering ground is becoming wider in some ways and narrower in others. “He will have to reduce the level of his debt, I think there is no Italian who is not aware, not only in government,” says Gentiloni. “When this reform is approved, Italy will be able to do it more gradually and it will also be able to do it in the way that Italy has decided”.

For countries with debt/GDP over 60% it’s a deficit/GDP greater than 3%, the Commission will provide trajectories for expenditure trends (the only benchmark) for a minimum of four years, extendable to seven. These countries will have to ensure that at the end of the period the debt/GDP is lower than at the start and until the deficit is over 3% of GDP they will have to guarantee a minimum budget adjustment of 0.5% of GDP per year.

This is the quantitative reference specified in advance, the compromise point to convince Germany not to directly cage the reduction of the debt/GDP at a fixed rate year by year. To ensure long-term debt stability, the values ​​of 60 and 3% of GDP will therefore remain standing. But it will fail what was originally planned, that is the reduction of one twentieth a year of the debt in excess which for countries like Italy are evidently unattainable.

The proposal therefore takes into consideration “a single operational indicator anchored to debt sustainability” which will serve “as a basis for defining the budgetary path and carrying out annual budgetary surveillance for each Member State”, the text clarifies. This single indicator should be based on nationally financed net primary expenditure, i.e. expenditure excluding discretionary revenue measures and excluding interest expenditure as well as cyclical unemployment expenditure. and expenditure related to Union programs entirely covered by revenues from Union funds”.

Any decision to order a member state to reduce its deficit will be based on a request from the Council “to implement a corrective net expenditure path which ensures that the government deficit stays or is brought and maintained below the reference value within the set deadline in the notice”. “For the years in which the general government deficit is expected to exceed the reference value”, i.e. 3%, “the corrective path of net expenditure is consistent with a minimum annual adjustment of at least 0.5% of GDP as benchmark”. These provisions replace the so-called “twentieth rule”, which – the Commission admits – “imposed a demanding budgetary effort on some Member States”.

Stability and growth pact, what it is for and how the European rules on budgets change

by the Economics editorial staff

April 26, 2023

However, there are clauses – specific to the countries or general – which will allow deviations from the agreed spending targets, in the event of a deep recession in the Old Continent or due to extraordinary factors beyond the control of the national authorities. The Council, on a recommendation from the Commission, will adopt them.

Automatic infringement for those who do not respect the commitments

“While the proposals give Member States more control over their medium-term plans, they also provide for a stricter enforcement regime to ensure that Member States meet their commitments. For Member States facing substantial public debt challenges, deviation from the agreed fiscal adjustment path will automatically lead to the opening of a excessive deficit procedure“, clarifies the Commission.

“Regulations are fully effective only if they go hand in hand with credible enforcement – adds Dombrovskis – This is why we intend not to change the procedures for excessive deficits and we will strengthen the debt-based excessive deficit procedure. This will be opened by default if countries with substantial debt challenges fail to comply with the rules. Moreover, countries will face stricter tax requirements if they do not carry out the reforms and investments they have committed to. We can also impose financial sanctions, which will be more enforceable by lowering the amounts.”

In the event of a change of government – explains Dombrovkis – “there is the possibility of modifying the tax plans” for debt reduction. “The Commission will formulate a new trajectory in which it will take into account the progress made in the plan to be amended, or any shortcomings. In any case, the fiscal effort cannot be weakened”.

No “special” investment

The Commission’s proposal “does not introduce special treatment for any particular type of investment” while acknowledging the need for “high levels of investment and reforms to achieve a just green and digital transition and boost defense capabilities, among other common priorities of the “The issue was widely discussed in the context of the public debate on the review of economic governance and no consensus emerged”, explains the European executive. To promote investments in strategic sectors, the Commission proposes a fiscal adjustment path average, which will leave Member States free to decide on their public spending priorities and provide incentives to engage in a range of reforms and investments that meet common and transparent EU criteria, subject to common criteria and sustainability safeguards of the In essence, those who make investments and reforms will have more time to reduce their debt.

The next steps

For Gentiloni it is “very important that the Commission has put a proposal on the table. Obviously we believe it is very good and balanced, but at the same time we will cooperate with the Member States to bridge the differences of opinion”. The text is already awaited, at least informally, at the Stockholm Eurogroup in the next few days. L’Hollandleader of the so-called “frugal countries”, in the words of a government spokesman “welcomes” the European Commission’s proposal to reform the EU’s economic governance framework and “will study it. It is important to underline that the new rules should lead to ambitious debt relief and improved debt sustainability for highly indebted countries, to better compliance and enforcement, to strengthening the European economy supported by investment and reforms, and to transparency and equal treatment”.

Giorgetti: “Steps forward but the Pnrr had to be excluded”

“We take note of the commission’s proposal on the new stability pact. It is certainly a step forward but we had strongly requested the exclusion of investment expenses, including those typical of the digital Pnrr and green deal, from the calculation of the target expenses on which compliance with the parameters is measured. We acknowledge that this is not the case”. So in a note the Minister of Economy Giancarlo Giorgetti.