After four years with the budgetary discipline of the European stability rules on hold, the European Commission has given a boost to the design of new rules with the presentation of its legislative proposal. The idea is that the new mandatory budgetary rules for the States are definitively approved in the second half of 2023, under the Spanish presidency of the EU, for their full application in the 2025 Budgets. The 2024 Accounts are considered transitional towards this new model.
Why new rules?
The European institutions opened the debate for the design of new rules at the beginning of 2020, before the outbreak of the covid health crisis. The 2008 financial crisis and the subsequent euro debt crisis (starting in 2010) revealed the ineffectiveness of the rules defined since 1992 to achieve the objective of a deficit of less than 3% of GDP and a debt of less than 60 % of GDP in each of the member states. The rules, still in force, to achieve these objectives proved to be complex, not very transparent, difficult to comply with, and procyclical: when countries did badly, they did worse with the rules (as evidenced by the crisis in Greece) and vice versa. Its system of sanctions, with fines that could reach 0.5% of GDP, was never applied despite the flagrant non-compliance in which so many Germany and Franceas later the countries of the South (Greece, Italy, Spain, Portugal or Ireland). The objective of the reform is a gradual and sustained reduction of public debt, compatible with economic growth and investment.
Are the references of 3% and 60% of GDP preserved?
Yes, the new rules will preserve the objectives established in the Maastricht Treaty (1992) of a public deficit of less than 3% of GDP and a debt of less than 60% of GDP. What changes are the rules to achieve those goals. It is intended that they be more gradual and adapted to the situation of each country. In addition, at the last minute, the proposal of the European Commission has incorporated that when a country has a deficit of more than 3%, it must undertake at least an annual adjustment of 0.5% of GDP in its four-year adjustment plans (Spain closed 2022 with a deficit of 4.8% of GDP and expects to place it below 3% in 2025).
What are the main changes?
In the new scheme, countries with a debt greater than 60% of GDP (Spain closed 2022 with a rate of 113%) must design, in agreement with the European institutions, an adjustment plan to 4 years, extendable to 7 years if certain investment and reform commitments are assumed. At present, the convergence plans span three years.
In addition, the settings will be defined from a spending ceiling (A certain annual percentage of variation of the net primary expenditure, without taking into account interest on public debt or cyclical unemployment spending). Currently, when a country exceeds the debt level of 60% of GDP, the so-called rule of ‘the twentieth part’: the difference between the debt level and 60% must be eliminated within a maximum period of 20 years, at a rate of one twentieth of the difference each year.
How will countries have to settle their accounts?
Each country must agree with the European institutions a four-year adjustment plan for primary spending (for the period 2025-2028) that guarantees two issues. First: that he deficit falls (or remains) below 3% of GDP. Second: a correction of the public debt that should continue its pending during the 10 years after the period of the plan (until 2038) even if no new adjustments are adopted. The four-year period may be extended to seven if the plan assumes certain commitments of investment and reforms.
How will it affect Spain?
With data from 2022, there are thirteen countries in the European Union with a level of debt above 60% of GDP and Spain is one of them. Spain closed 2022 with a debt level of 113% of GDP, only below Greece, Italy, Portugal and France. Spain, Well, it is one of the countries that will be more focused by the new rules. The Independent Authority for Fiscal Responsibility (Airef) has made some estimates for Spain. According to them, in order to meet the requirements of the new rules, Spain should plan an adjustment around the 0.43% of GDP annually for four years, equivalent to about 5,720 million each year, which is an amount similar to that of the State Health expenditure (for the four years the adjustment would add 22,876 million in total). In the case of applying a seven-year plan, the Airef estimate indicates the need for an annual adjustment around the 0.32% of PIB, equivalent to about 4,256 million each year, which is an amount similar to that of the State’s spending on Education (scholarships) (for the seven years, the adjustment would add 29,792 million).
Will the sanctions regime be maintained?
The reform proposed by Brussels maintains the Excessive Deficit Procedureo (PDE) and incorporates a penalty scheme, but this will be different from the current one. There will be Economic sanctions, but not as high as those of the model still in force (sanctions between 0.2% and 0.5% of GDP) so that they can become effective and applicable. In addition there will be reputational sanctions, such as, for example, the appearance of the heads of government before the European Parliament. The sanctions will be activated when the countries move away from the four or seven year adjustment path agreed with the European Commission.
When will the new model come into force?
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It is expected that the member states can sign an agreement on the new fiscal rules in the second half of 2023, coinciding with the Spanish presidency of the EU. The goal is for the new rules to enter into force in 2025. For now, 2024 is considered a transition year: the new rules will not yet be in force, but the European Commission has asked the Member States to prepare their 2024 Budgets in the most adjusted way possible to them, with the necessary adjustments. In addition, in the spring of 2024 the examination of the Excessive Deficit Procedure (PDE), which was suspended from 2020 (with the covid crisis) and which will scrutinize the 2023 accounts.
Do all countries agree?
Spain and the Netherlands have led the debate in favor of greater flexibility in the stability rules. Germany has pressured so that this greater flexibility does not translate into a more lax scheme and seeks the incorporation of clear numerical references that allow strict scrutiny of compliance. Hence, at the last minute, the legislative proposal of the European Commission has incorporated the requirement of a minimum annual adjustment of 0.5% of GDP for countries with a deficit of more than 3% of GDP.