Factbox-Main elements of the EU fiscal reforms now under negotiation

By Jan Strupczewski

BRUSSELS (Reuters) – European Union finance ministers will discuss changes to the EU’s fiscal rules on Thursday and Friday to reach a deal or bring positions closer on a reform that would offer countries tailor-made debt reduction paths and incentives to invest.

Below are the main points of the new approach now under negotiation.

FOCUS OF THE RULES

The rules focus on net primary expenditure every year – the indicator under a government’s direct control. The European Commission and the country concerned will agree on a path for net primary expenditure for four years to cut its debt and deficit to below the EU’s limits of 3% and 60% of gross domestic product (GDP) respectively.

This differs from the current rules that target several indicators at the same time – the headline budget deficit, structural deficit and public debt. Some, like the structural deficit, are not directly observable and often revised significantly.

FOUR AND SEVEN-YEAR PLANS

The four years to bring down public debt through control of government spending can be extended to seven years if a government makes certain types of investments and reforms.

One of the sticking points in the talks now is whether reforms and investment in green and digital technologies approved by the EU to pay out in cash from its post-pandemic recovery fund are enough to automatically extend the time.

SPEED OF DEBT REDUCTION

To make fiscal consolidation faster for countries that have high debt like Italy, Greece or France, the new rules are to set a minimum average annual amount of debt reduction.

The latest proposal from Spain, which holds the rotating EU presidency and is therefore responsible for finding a compromise, is that countries with debt above 90% of GDP should cut it by a minimum 1% of GDP a year. For countries with debt between 60% of GDP and 90% of GDP, the reduction can be slower at 0.5% of GDP a year.

This is much less ambitious than the current unrealistically high requirement that every country should cut debt by 1/20 of the excess above 60% a year. But it is more stringent than the original plan that any debt cut over four years would be enough.

SPEED OF DEFICIT CUTS

The upper limit for a budget deficit remains 3% of GDP, but the new rules are to introduce a “deficit resilience safeguard” – a margin below the 3% ceiling that would be used in planning the spending path, to make sure the government has room for manoeuvre even when something unexpected happens, without breaking the 3% EU limit. The size of this margin is under negotiation and the latest proposal sets it at 1.5% of GDP.

To create that margin, governments will be asked to improve their structural primary balances by a certain amount every year. The size of the improvement is to be agreed. The Spanish proposal is for 0.3% to 0.4% of GDP improvement a year if a country has four years for it and 0.2% to 0.25% if seven years.

This is slightly more lenient than the current rules, which oblige governments to cut structural deficits by a minimum 0.5% of GDP a year until the budget is balanced or in surplus. The current rules also say a deficit in excess of 3% of GDP should be brought down below the ceiling again the following year, unless there are special circumstances.

ENFORCEMENT

To enforce the agreed spending path, the Commission will be able to launch disciplinary steps, that could end in fines, against a government that would exceed its spending by a certain amount in a given year, or by a certain amount cumulatively over the four- or seven-year period.

The size of the excess spending that would trigger the disciplinary procedure is under negotiations. The Spanish propose it should be 0.25% to 0.5% of GDP annually or 0.5% to 0.75% of GDP cumulatively when a country has debt above 60% and is also running a deficit.

Source link