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Fiscal policy: inclusive growth and debt sustainability for the 2024 guidance
While the European Union waits for the official future economic governance framework, the Commission has recently provided guidance to all Member States on the coordination and conduct of fiscal policy for next year. The proposed revised framework seeks to strengthen debt sustainability and reduce high public debt ratios while promoting sustainable and inclusive growth in all Member States.
The European economy entered 2023 on a healthier footing than projected in autumn. At the same time, it continues to face headwinds and high levels of uncertainty: inflationary pressures persisting, monetary policy tightening is set to continue, dampening demand. The EU fiscal framework is currently in a transitionary phase.
Fiscal measures have mitigated the impact of the energy crisis on businesses and consumers. However, broad-based fiscal stimulus to aggregate demand is unwarranted and costly support measures cannot continue indefinitely: the focus must now be on strengthening fiscal sustainability through gradual fiscal consolidation and, where still needed, on targeted fiscal measures that support vulnerable households and firms affected by high energy prices.
Prudent fiscal policy will help to ensure the stability of the European economy and facilitate the effective transmission of monetary policy in a high inflation environment, while raising potential growth.
Discussions on a revised economic governance framework, based on the Commission's orientations presented in November 2022, are ongoing. The fiscal elements of the proposal have been discussed at the Economic and Financial Committee, as well as at ministerial level at the ECOFIN Council and, for issues specifically relevant to the euro area, at the Eurogroup. This communication sets out guidance for Member States on the conduct and coordination of fiscal policy, in light of the challenges facing public finances and the economy and the discussions on the future economic governance framework.
Consequences of the deactivation of the general escape clause
Included into the Stability and Growth Pact, the general escape clause was an important element of the EU response to the COVID-19 pandemic. The clause - together with the ‘unusual events' clause’ - allowed Member States to undertake appropriate budgetary measures in the face of exceptional circumstances. In other words, the general escape clause provided for a temporary deviation from the budgetary requirements that normally apply in the event of a severe economic downturn. As the extraordinary measure that it is, its time will not be infinite, and it will be in fact deactivated at the end of 2023, noting that European economy has recovered beyond its pre-pandemic level and has now weathered the acute phase of the energy price shock caused by Russia's invasion of Ukraine, although uncertainty remains high.
Returning to the sole implementation of the Stability and Growth Pact in force prior to the activation of the general escape clause in 2020 has not being considered as an option from the Commission. To allow for an effective bridge to the operation of the future set of EU fiscal rules and to take account of the post-pandemic reality, some elements of the Commission reform orientations could be incorporated into the fiscal surveillance cycle starting in spring 2023. Therefore, in the spirit of the Commission reform orientations, Member States are invited to submit Stability and Convergence Programmes that include their medium-term fiscal and structural plans.
Guidance on the preparation of stability and convergence plans
Governments should pursue prudent fiscal policies, protect public investment and phase out energy support measures, starting with the least targeted. Lastly, given the still high economic uncertainty, we have decided not to open any Excessive Deficit Procedures until Spring 2024" said Commissioner for the economy Paolo Gentiloni.
The proposed revised framework seeks to strengthen debt sustainability and reduce high public debt ratios while promoting sustainable and inclusive growth in all Member States. The key objectives of the proposal are to improve national ownership, simplify the framework and move towards a greater medium-term focus, combined with stronger and more coherent enforcement.
National medium-term fiscal-structural plans that integrate fiscal, reform and investment objectives are the cornerstone of the revised framework. This will provide Member States with greater leeway in setting their fiscal adjustment path, within a common EU framework that would go hand-in-hand with stronger enforcement.
The recommendations the Commission will propose on fiscal policy for 2024 are:
- in line with the fiscal targets Member States set out in their stability and convergence programmes, so long as those targets are consistent with ensuring that the public debt ratio is put on a downward path or stays at a prudent level and that the budget deficit is below the 3% of GDP reference value over the medium term;
- quantified and differentiated on the basis of Member States' public debt challenges;
- formulated on the basis of net primary expenditure, as proposed in the Commission's reform orientations.
An implementation of the Excessive Deficit Procedure (EDP)
In spring 2022, the Commission committed to assess the relevance of proposing the opening of Excessive Deficit Procedures in spring 2023, in particular taking into account compliance with the fiscal CSRs addressed to the Member States by the Council on 12 July 2022.
Taking into consideration the persistently high uncertainty for the macroeconomic and budgetary outlook at this juncture, the Commission considers that a decision on whether to place Member States under the Excessive Deficit Procedure should not be taken this spring.
At the same time, the Commission will propose to the Council to open deficit-based Excessive Deficit Procedures in spring 2024 on the basis of the out turn data for 2023, in line with existing legal provisions. Member States should take account of this in the execution of their 2023 budgets and in preparing their Stability and Convergence Programmes this spring and the Draft Budgetary Plans for 2024 this autumn.
What will happen next
This Communication sets out preliminary fiscal policy guidance for 2024 which will be updated as necessary as part of the European Semester Spring Package in May 2023.
The Commission intends to table legislative proposals following the upcoming Economic and Financial Affairs and the European Council in March 2023.