The new European rules for public deficit and debt come into force this Tuesday, aiming to guarantee the recovery of public finances and investment.
European Union (EU) budgetary rules were suspended following the covid-19 pandemic, to enable Member States to cope with the crisiswith a consensus then being registered regarding the need to review and update legislation on economic governance before resuming the Stability and Growth Pact, originally created in the late 1990s.
Debt ratio is expected to decrease of at least one percentage point per year for countries with a debt ratio above 90% of GDP (as is the case of Portugal) and half a percentage point for those between this ceiling and the 60% level of GDP.
Each Member State begins to prepare a national medium-term planwhich the European Commission will evaluate, defining a period of at least four years for the debt to be placed on a downward trajectory, with this period being able to be seven years in the face of reforms and investments (such as those included in the Recovery and Resilience Plans).
An annual public spending cap will be introduced for maximum deviation.
What is the European Union’s economic governance framework?
The economic governance framework aims “detect and correct economic imbalances” that could weaken national economies or affect other EU countries, through their repercussions. It is based on three fundamental pillars:
- The Treaty on the Functioning of the European Union (TFEU), which sets reference values for the budget deficit (3% of GDP) and public debt levels (60% of GDP) of the Member States.
- The Stability and Growth Pact (PEC), which defines rules for the monitoring and coordination of national budgetary and economic policies, containing preventive and corrective rules.
- The regulations “six pack” It is “pack of two”which aim to reinforce budgetary surveillance and introduce the procedure for macroeconomic imbalances that arise outside the scope of budgetary policies.
What are the main objectives of the new governance framework?
The new framework aims to reduce debt ratios and deficits “gradually and realistically”, safeguard reforms and investments in strategic areas, “provide adequate scope for countercyclical policies”, correct macroeconomic imbalances and “achieve common medium and long-term strategic objectives”, according to the Council of the EU.
What changes in the new rules compared to the previous ones?
With the reform, The National Reform and Stability Programs, which Member States sent to the European Commission during the month of April, ‘fall’being replaced by national medium-term budgetary-structural plans.
At the same time, the sustainability of public debt becomes a central element, with the objective of setting it below 60% in the medium term, while simultaneously keeping the budget deficit below 3% of GDP, and there will be a “reinforced enforcement regime”, to ensure that Member States fulfill the commitments made in their plans.
What are the medium-term national budgetary-structural plans?
The objective of these programs is to adopt a differentiated approach towards each Member State. In practice, Brussels starts to take into account the heterogeneity of budgetary situations, public debt and economic challenges in different countries.
Like this, These plans will have national budgetary objectives, measures to correct macroeconomic imbalances, and prioritized reforms and investments over a four- or five-year period.
Each Member State will have to design a medium-term structural budget plan, until September 20, 2024, which includes its budgetary, reform and investment commitments.
What does each country do with recommendations?
Countries should incorporate their budgetary adjustment path into their national medium-term structural budgetary plans, based on the reference path or on technical information. After the presentation, the European Commission makes an assessment and recommendation of the plans, which will serve as a basis for the Council to adopt a recommendation that determines the trajectory of each Member State’s net expenditure as a single indicator.
What is the net expenditure indicator?
The single operational indicator, based on debt sustainabilitywill serve as a basis for defining the trajectory of net expenditure and carrying out annual budgetary surveillance for each Member State.
It will be based on net primary expenditure financed at national level, i.e. expenditure excluding discretionary measures on the revenue side, interest expenditure, cyclical unemployment expenditure, national expenditure on co-financing of EU-funded programs and expenditure on EU programs entirely covered by revenue from EU funds, details the information from the Commission.
This indicator will not be affected by automatic stabilizersincluding fluctuations in revenue and expenditure outside the direct control of the government.
What happens if a plan does not meet the requirements?
The Council should recommend to the Member State to present a revised plan. The European Commission will use a control account “to monitor Member States’ cumulative upward and downward deviations from their agreed net expenditure trajectories”.
How does the reference trajectory recommendation work for each country?
The Commission will indicate a risk-based and differentiated benchmark trajectory, expressed in terms of multi-annual net expenditure, to Member States that have a public debt and budget deficit that exceed the reference values of 60% and 3% of GDP, respectively, explains Brussels.
The objective is for this trajectory to ensure that, during the four-year budgetary adjustment period, public debt “reasonably decrease or remain at prudent levels, i.e. below 60% in the medium term”while ensuring that the budget deficit is reduced and maintained below 3% of GDP in the medium term.
At the same time, longer adjustment trajectories may be accepted. In these cases, Member States may request an extension of the fiscal adjustment period, for a maximum period of seven years, if they carry out certain reforms and investments that improve growth potential and support, for example, fiscal sustainability.
Does the corrective aspect still exist?
Yes, but the debt-based excessive deficit procedure will focus on deviations from the net expenditure path. Therefore, the relationship between public debt and GDP will be considered to be decreasing sufficiently and approaching the reference value at a satisfactory rate if the Member State in question respects its net expenditure trajectory.
However, The Commission may consider initiating the excessive deficit procedure based on the debt criterion if the deviations recorded in the Member State’s control account exceed 0.3% of GDP annually or 0.6% of GDP cumulatively.
Various factors will then be considered, including “the seriousness of the public debt situation, the size of the diversion, progress in implementing reforms and investments and, where appropriate, the increase in defense spending”.
The Council maintained the rules of the excessive deficit procedure based on the deficit criterion, which requires a minimum annual structural adjustment of 0.5% of GDP. In case of non-compliance, fines may amount to 0.05% of GDP and accumulate every six months until corrective measures are taken.
The European Commission said that temporarily “may, in 2025, 2026 and 2027, take into account the increase in interest payments when defining the proposed corrective path under the excessive deficit procedure”.
Are there safeguards?
The reference path will respect the debt sustainability safeguard and the deficit resilience safeguardaccording to information from the Council.
In the new rules, the debt sustainability safeguard will ensure that the public debt ratio decreases by a minimum annual average of 1% of GDPas long as the debt ratio of the Member State exceeds 90%.
For countries where the ratio remains between 60% and 90%, the average is 0.5% of GDP. This safeguard does not apply to countries whose debt ratio is below 60%.
The safeguard relating to deficit resilience “provides a safety margin below the 3% reference value of the deficit foreseen in the Treaty” and aims to prepare national budgets for the future through “creation of budgetary reserves”.
With Lusa
