Fiscal rules (II): national budgetary norms

On 25 October, I wrote a column in this newspaper entitled “On fiscal rules: a hidden matter in the public debate”,  in which I gave a European perspective on the much-needed revision of budgetary norms and spoke in favour of structurally maintaining NextGenerationEU (NGEU). In addition to providing a counter-cyclical instrument for the EU, this would give coherence to the way the Stability and Growth Pact and the Macroeconomic Imbalance Procedure coexist. In any case, I must also outline certain points regarding the revision of the Stability and Growth Pact itself, or rather, the rules that are applied to national budgets.

Firstly, everything seems to indicate that we could analyse the sustainability of each individual national debt using an observable control instrument, such as the evolution of public spending (net of taxes), that would be more or less restrictive depending on whether the country is in the pact’s preventative or corrective arm. Making individual, country-specific recommendations is something that has already been carried out by the Commission informally, although there has been no focus on observable variables and the practice would now need to be written into law.  In this case, the Commission would have noticeably more power, with greater discretion to analyse the sustainability of debt, even if the rules are unclear. To that effect, it would be reasonable to start the European Semester with a formal proposal from the Commission on the desired annual fiscal position of the European Union, also assessing the EU budget and the NGEU, which would have to be ratified by the Council of the EU and the European Parliament. Then, in its co-executive role, ECOFIN would work together with the Commission to negotiate how to build that macro vision into each of the national budgets, based on the fiscal rules themselves. Additionally, independent fiscal institutions should oversee the technicalities of this entire process. However, fiscal policy, as the core of our democracies, cannot be outsourced to this kind of body, unless we wish to risk surrendering liberal democracy altogether. No taxation, without representation.

Secondly, there are two urgent issues that need to be debated. On the one hand, how to tackle the process of fiscal consolidation for debt that has already been issued. On the other, how to fund the huge public investment needed to progress, especially in achieving ecological transition.

Regardless of whether or not the public debt ceiling that allows countries to remain in the preventive arm of the Stability and Growth Pact stays at 60% of GDP, the biggest constraint is the requirement to reduce any debt above this limit by one-twentieth of the amount each year. The European Stability Mechanism published a reform proposal to raise the ceiling to 100% but keep the same rate of debt reduction. Of course, it is possible to find equivalent combinations of ceilings and debt reduction rates.  However, from a political point of view, changing the 60% debt ceiling requires a unanimous decision from Member States, whereas updating the one-twentieth debt reduction rule can be achieved by majority and co-decision by the Parliament. Therefore, it would be more appropriate to opt to reduce the debt reduction rate.

On the other hand, in the debate on giving public investment a much-needed boost to accelerate the green transition, the option of having some form of golden rule is once again on the table. However, if the reform of the Stability and Growth Pact were to only focus on this, without also addressing the previous point, it would be of little use to indebted countries. Unless the rate of reduction for debt that is already issued were significantly reduced, the primary surpluses required by a golden rule could make using this flexibility rather impractical. If we add to this the existence of increasingly flexible state aid that is intended to also facilitate green public investment, it would only deepen the differences within the single market, as not all countries would be on an equal footing to use these instruments. Furthermore, in periods of financial stress, whether or not it counts under EU rules, any debt is still a liability.

In any case, it does seem that some progress could be made in promoting green investments, whether or not they are «deductible» from the Stability and Growth Pact. This could be facilitated by the European Union through the Recovery and Resilience Facility, supervised by the Commission and made accessible for all states. This has been proposed, for example, by the Centre for European Reform. This option is preferrable to a national golden rule and would help to encourage new investments. However, this path should not eliminate the counter-cyclical nature of NextGenerationEU, something which the Elcano Royal Institute, by the way, supports. Beyond the present-day urgent matters, we cannot lose sight of the fact that the EU needs an automatic stabilising instrument, based on the NGEU itself and on the unemployment programme, SURE.

In the end, this debate will continue for a number of months, and it may be that no agreement is reached before the current general escape clause is potentially lifted this spring. Governments need clear direction to set their 2023 budgets and the previous rules cannot be applied. Time will tell what happens next.

Jonás Fernández, MEP and spokesperson for the S&D Group in the Committee on Economic and Monetary Affairs.

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