The coordination of fiscal policy in the EU Bucharest, 10 April 2008 Elena Flores, European Commission
Mar 27, 2015
The coordination of fiscal policy in the EU
Bucharest, 10 April 2008
Elena Flores, European Commission
2
INDEX OF PRESENTATION
1. Multilateral fiscal policy surveillance: overview of the architecture
2. Fiscal policy-making in the EU: evolving rules
3. How did it work? Challenges ahead
3
1. Multilateral fiscal policy surveillance: overview of the architecture
• The rationale for sound public finances in EMU
• Why EMU-specific fiscal rules?
• The Maastricht fiscal rules
• The Stability and Growth Pact
4
The rationale for sound public finances in EMU
1. PRICE STABILITY
Support ECB monetary policyLower interest rates - Low interest paymentsLonger time-horizon: more private investment
2. SMOOTHING THE CYCLE
No national monetary policy need for room to let automatic stabilizers play freely
3. STRUCTURAL REFORM & SUSTAINABILITY
Need for room to implement reform that have a short term cost for public finances; Cope with the impact of ageing.
5
Why EMU-specific fiscal rules?
EMU unprecedented historical experiment
- monetary policy is centralised whilst fiscal policy is decentralised (MS)
-EMU-specific fiscal rules are best seen as device to ‘protect’ an independent stability-oriented common monetary policy against (possibly) destabilising opportunistic national fiscal policies
6
The Maastricht fiscal rules: Treaty
• “Member States shall avoid excessive government deficits” (Treaty Article 104)
– deficit below the reference value of 3% of GDP, unless it has declined substantially and continuously and reached a level close to the reference value or the excess is limited, exceptional and temporary
– debt should not exceed the reference value of 60% of GDP, or should be on a decreasing trend and approach the reference value at a satisfactory pace
7
The SGP (2): preventive arm
• Euro area Member States are obliged to annually submit stability programmes to the Commission, non-euro area Member States have to submit convergence programmes
• The medium-term budgetary position must ensure a safety margin against breaching the 3% limit
• The Council gives an early warning in case of significant divergences of budgetary positions from the medium-term budgetary objectives (MTO’s) or the adjustment path towards them
8
The SGP (3): corrective arm
• Tight timetable for the Excessive Deficit Procedure so as to arrive at a speedy decision on the existence of an excessive deficit
• First steps on the decision on the existence of an ED • Following steps on the correction of an excessive deficit
-Art 104.7: recommendation to correct the ED
-Art 104.9: strengthened surveillance• Sanctions if the EDP does not lead to a deficit correction
9
2. Fiscal policy-making in the EU: evolving rules
• Overview
• Positive aspects
• Difficulties
• Changing circumstances
• Reform of the Pact
10
Overview
1. Positive aspects
1. Anchoring budget deficits
2. Putting sustainability of public finances on top of the policy agenda
2. Difficulties
1. Medium-term budgetary objectives turned into moving targets(overly optimistic forecasts; insufficient control of public spending)
2. SGP worked asymmetrically over the cycle (pro-cyclicality)
3. Short-sightedness in the conduct of budgetary policy (one-offs)
4. Lack of political will (Early warnings not effective; events of Nov 2003)
5. Rising concerns about equal treatment among MS
3. Changing circumstances
1. Relation deficit and debt criterion weakened (stock-flow adjustment)
2. Increased economic heterogeneity in enlarged EU-25 made more difficult “one-size-fits-all”
3. Ageing populations
11
Positive aspects: anchoring budget deficits
35
40
45
50
55
19701972
19741976
19781980
19821984
19861988
19901992
19941996
19982000
20022004
2006
% o
f G
DP
-2
-1
0
1
2
3
4
5
6
GD
P g
row
th r
ate
Deficit
Expenditure
Growth rate
Revenues
12
Positive aspects: increase in debt levels stopped
20
30
40
50
60
70
80
1970 1975 1980 1985 1990 1995 2000 2005
debt
rat
io, a
s a
% o
f GD
P
EUR-12
EUR-15
13
Difficulties: MTO’s became moving targets
-7
-6
-5
-4
-3
-2
-1
0
1
1990 1992 1994 1996 1998 2000 2002 2004 2006
ActualProjections
3rd
4th
1st vintage
2th
5th
6th
14
Difficulties: lack of consolidation in good times
98
3 3
1 1
3 3
5 5
-5
-4
-3
-2
-1
0
1
2
3
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
-15
-12
-9
-6
-3
0
3
6
9
Output Gap (lhs)
Cyclically-adjusted balance (lhs)
Number of MS with a deficit >3% (rhs)
Fiscal consolidation in bad times
No consolidation in good times
Bad times, timid consolidation
15
Difficulties: short-sightedness in the conduct of fiscal policy
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
1999 2000 2001 2002 2003 2004 2005
as %
of
GD
P
One-off measures
General government balance
Cyclically-adjusted balance
Cyclically-adjusted balance net of one-offs measures
16
Changing circumstances
– Relation deficit and debt criterion weakened (stock-flow adjustment)
– Enlargement - EU-25
– Ageing populations
=> Enriched common framework with stronger rationale and more focus on sustainability and debt
17
Changing circumstances:Heterogeneity
BE FIN
AT1
FR
EUR-12
IT
UE-25
CZNL
UK
SW
EE
LV HUN
GE
DK
SP
IE
LUX
SK
LT
POL PTMT
SI
ELCY
0%
2%
4%
6%
8%
10%
12%
14%
0 50 100 150 200 250
Gross domestic product at current market prices per head of population (% EU average)
Ave
rage
pot
ent
ial g
row
th,
in n
omin
al t
erm
s 20
00-2
005
18
Reform of the Pact
• Reform of the Pact: preventive arm
• Reform of the Pact: corrective arm
• Reform of the Pact: evaluation
19
Reform of the Pact: preventive arm
In November 2003, conflict Council/Commission about the SGP: a reform process was launched in 2004, agreement in March 2005, enacted in Council regulations in July 2005
New Council Regulation: 1055/2005 amending Regulation (EC) No 1466/97
• Differentiated medium-term budgetary objectives according to MS specificities (debt, potential growth, implicit liabilities)
• Annual structural adjustment of 0.5% GDP as a benchmark
• Larger efforts required in ‘good times’
• New incentives for structural reforms (deviation permitted)
• Direct “early policy advice” by Commission
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Reform of the Pact: preventive arm
• SGP complemented by national budgetary rules and institutions
• Need to base budgetary projections on realistic macroeconomic forecast
• SCP for the legislature
• National Parliaments increased role (discuss SCP and Council opinions, follow up recommendations to EW and EDP)
21
Reform of the Pact: corrective arm New Council Regulation: 1056/2005 amending Regulation (EC) No 1467/97
• Always a report Art 104(3) when deficit exceeds 3%,
• No expenditure item excluded, as demanded by some MS
• Clarification of nature and role of ‘Other Relevant Factors’ (which are taken into account only if the deficit close to the reference value and if the excess is temporary)
• Minimum fiscal effort required for MS under EDP of ½ % of GDP irrespective of other relevant factors
• Possibility of extended deadline for correction of excessive deficit to better reflect economic situation
• Modifications of exceptional circumstance (“severe economic downturn”) when growth is negative
• Possibility to repeat steps in the EDP in case of unexpected adverse events
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Reform of the Pact: evaluation
1. A rules-based system was preserved1. 3% and 60 % remain the nominal anchors2. No re-definition of the budget deficit3. Exceptions granted from 3 % ceiling only if the deficit remains close to
the reference value and excess is temporary
2. Removed incentives for time-inconsitent policies and short-sightedness of fiscal policy
1. One-off and temporary measures not included in fiscal effort
3. Stronger economic underpinnings1. Allowing for country-specific elements in setting MTOs and in
adjustment path to MTO2. Incentives for fiscal consolidation in good times3. Linking structural reforms with fiscal policy4. Economic elements taken into account in deciding on existence of
excessive deficits and in setting deadlines for their correction5. Obligation of fiscal efforts in the EDP
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3. How did it work? Challenges ahead
Data taken into account by the Council when deciding on the existence of an excessive deficit
2004 2005 2006 Conclusions
IT 3.1% of GDP
(observed)
3.6% of GDP
(COM spring-05 forecast)
4.6% of GDP
(COM spring-05 forecast) Close, not temporary
PT 2.9% of GDP
(observed)
6.2% of GDP
(Plans of the Portuguese authorities)
4.8% of GDP
(Plans of the Portuguese authorities) Not close, not temporary
UK 3.2% of GDP
(observed)
Just below 3½% of GDP
(COM autumn-05 forecast)
Around 3.1% of GDP
(COM autumn-05 forecast) Close, not temporary
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3. How did it work? Challenges ahead
Indentification (= year t)
Deadline for the
correctionEffort in t Effort in t+1 Effort in t+2 Effort in t+3
Yearly average
GE 2003 2004 (t+1) - - 0.5% of GDP
FR 2003 2004 (t+1) > 0% of GDPat least 0.5% of
GDP- - 0.3% of GDP
NL 2004 2005 (t+1) 0.6 % of GDPat least 0.5% of
GDP- - 0.5% of GDP
GR 2004 2005 (t+1) - 0.5% of GDP
IT 2005 2007 (t+2) > 0% of GDP - 0.6% of GDP
PT-II 2005 2008 (t+3)Package of
0.6% of GDP1.5% structural 0.75% structural 0.75% structural 0.9% of GDP
UK2006 (fiscal
year)2006 (t) 0,5% structural - - - 0,5% of GDP
104(7) rec. under the original
SGP to EU-15 Member
States
104(7) rec. under the
revised SGP
1.0% of GDP of structural measures
Structural measures of at least 1% of GDP over the 2 years
Change in the structural balance of at least 1.6% of GDP cumulated
25
3. How did it work? Challenges ahead
• Still a long way to go to reach the MTO
• Not sufficient consolidation in good times
• Better integrate medium and long tem fiscal challenges
• Improve efficiency of national fiscal rules
26
3. How did it work? Challenges ahead
0
0,5
1
1,5
2
2,5
3
3,5
4
Ave
rag
e p
rim
ary
CA
B o
ver
the
per
iod
199
0-20
05,
as a
per
cen
tag
e o
f G
DP
Very low coverage by fiscal
rules
Low coverage by fiscal
rules
High coverage by fiscal
rules
Very high coverage
by fiscal rules
Share of government finances covered by numerical fiscal rules and primary cyclically-adjusted primary balance
27
Reference material
• Economic and Monetary Union: Legal and Political Texts -edited jointly by the Commission and by the General Secretariat of the
Council of the EU (2007) -Link:
http://bookshop.europa.eu/eubookshop/FileCache/PUBPDF/QC7606262ENC/QC7606262ENC_002.pdf
Public Finance in EMU, link:http://ec.europa.eu/economy_finance/publications/publicfinance_en.htm
• Fiscal Policy Surveillance in Europe -edited by Peter Wierts, Servaas Deroose, Elena Flores and Alessandro
Turrini (2006)