The European Commission on 8 March provided guidance to EU Member States on the conduct and coordination of fiscal policy for next year.
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Why is the Commission issuing this Communication? What are the main issues discussed in the Communication?
The Communication provides guidance which seeks to inform Member States’ preparations of their stability and convergence programmes, in which Member States lay out their medium-term fiscal-structural plans. It discusses the fiscal policy response to the energy crisis, the implications of the deactivation of the general escape clause for fiscal guidance in 2024, and the implementation of excessive deficit procedures (EDPs). It also provides a state of play on the ongoing economic governance review.
The guidance will be followed in spring by fiscal country-specific recommendations for 2024 that will also guide the preparation and assessment of euro area Member States’ Draft Budgetary Plans in autumn.
The Communication takes into account the experience with similar guidance provided by the Commission in March 2021 and March 2022, which contributed to discussions in the Council, the Eurogroup and with other EU and international stakeholders on the appropriate fiscal policy response to the coronavirus crisis and its adaptation to the evolving situation.
Does this Communication constitute formal fiscal guidance to Member States? How does this differ from the fiscal country-specific recommendations provided in the European Semester Spring Package?
The Communication does not constitute formal guidance to Member States under the European Semester or the Stability and Growth Pact. Rather, it seeks to provide more clarity to Member States as they prepare their stability and convergence programmes.
The guidance contained in today’s Communication will provide an input to the upcoming Economic and Financial Affairs Council (ECOFIN) and Eurogroup discussions. Based on those discussions and taking into account the evolving economic situation, the Commission will propose specific fiscal policy guidance to each Member State as part of the European Semester Spring Package in May 2023.
What guidance is the Commission providing for Member States’ preparation of stability and convergence programmes?
Member States are invited to include in their stability and convergence programmes how their fiscal plans will ensure the respect of the 3% of GDP deficit reference value as well as plausible and continuous debt reduction, or for debt to be kept at prudent levels, in the medium term.
More precisely, Member States with substantial or moderate public debt challenges are invited to set fiscal targets that ensure plausible and continuous debt reduction or keep debt at prudent levels in the medium term. In addition, all Member States are invited to set fiscal targets that ensure that the deficit does not exceed 3% of GDP or is brought below 3% of GDP within the period covered by the stability or convergence programme, and credibly ensure that the deficit is maintained below 3% of GDP at unchanged policies over the medium term.
Member States are invited to discuss how their reform and investment plans are expected to contribute to fiscal sustainability and to sustainable and inclusive growth including notably the twin green and digital transition and resilience objectives, in line with the criteria set out in the Commission’s reform orientations.
Finally, Member States are also invited to report their assumptions on energy price developments and the budgetary impact of planned energy support measures (and their phasing-out) over the period covered.
What guidance is provided with regard to public investment?
The Communication provides that the Commission will continue to emphasise public investment in its fiscal country-specific recommendations. All Member States should continue to protect nationally financed investment and ensure the effective use of the Recovery and Resilience Facility (RRF) and other EU funds, in particular in light of the green and digital transitions and resilience objectives. A high quality of public investment should be ensured, including through investment financed from the RRF. Fiscal policies should support the twin transition in order to achieve sustainable and inclusive growth.
The fiscal adjustment of Member States with substantial or moderate public debt challenges should not weigh on investment but rather be delivered through limiting the growth of nationally financed current expenditure relative to medium-term potential output growth.
The Commission will take into account the need to sustain investment when monitoring fiscal outcomes against the fiscal country-specific recommendations.
What guidance is provided with regard to the fiscal cost of energy measures?
The country-specific recommendations for 2024 will also provide guidance regarding the fiscal cost of energy measures.
If wholesale energy prices remain stable and lower energy costs are passed on to retail prices as currently foreseen, government energy support measures should be further phased out in 2024 and related savings should contribute to reducing government deficits.
If energy prices increase again and support cannot be fully discontinued, targeted measures should protect vulnerable households and firms. Such a move would reduce fiscal costs, incentivise energy savings and allow the economy to adjust in a gradual and sustainable way over a limited period.
What has been the fiscal policy reaction to the energy crisis?
The surge of energy prices prompted Member States to implement fiscal policy measures, with sizeable fiscal costs. These measures mitigated the social and economic impact of the sudden rise in energy prices, in particular gas and electricity, on households and firms. At the same time, most of the measures were not sufficiently targeted to the vulnerable households and firms, and may also have reduced incentives to contain energy consumption and increase energy efficiency. The design of measures has nonetheless been improving with time. Based on the Commission Autumn 2022 Economic Forecast, the net cost of these measures in 2022 amounted to 1.2% of annual EU GDP. Based on available information in autumn, the net cost of energy measures was projected at 0.9% of GDP in 2023. However, several Member States have since autumn extended some existing measures or adopted new ones. Extending existing energy measures until the end of 2023 would entail a substantial increase in the related budgetary costs.
What indicator will be used for the formulation of fiscal country-specific recommendations?
The fiscal country-specific recommendations would be formulated on the basis of net primary expenditure (expenditure net of discretionary revenue measures and excluding interest expenditure as well as cyclical unemployment expenditure) as proposed in the Commission’s reform orientations.
Moving towards this indicator will represent a shift in focus compared to the period when the general escape clause was in place, when fiscal surveillance was focused on net nationally financed primary current expenditure and the preservation of nationally financed investment.
How will the fiscal guidance for 2024 interact with the Recovery and Resilience Facility?
The Communication provides that all Member States should continue to swiftly implement their national recovery and resilience plans and ensure the effective use of the Recovery and Resilience Facility (RRF) and other EU funds, in particular for the green and digital transitions and resilience objectives.
In their medium-term planning, Member States should take account of the temporary nature of the support provided by the RRF.
What is the status of the “general escape clause”?
The general escape clause of the Stability and Growth Pact will be deactivated at the end of 2023. The Commission Communication on the 2022 European Semester in May 2022 stated that the conditions to deactivate the general escape clause would be considered met as of 2024. The Annual Sustainable Growth Survey of November 2022 confirmed this assessment, noting that the European economy is out of a period of severe economic downturn. It has recovered beyond its pre-pandemic level and has now weathered the acute phase of the energy price shock caused by Russia’s war of aggression against Ukraine, although uncertainty remains high.
How does the guidance take account of the ongoing discussions on the future of the economic governance framework?
As the debate on reform of the economic governance framework is still ongoing, the current legal framework continues to apply. The Commission does not propose to shift to a new system of fiscal surveillance in 2024.
At the same time, some elements of the Commission’s reform orientations could be incorporated into the 2023-24 fiscal surveillance cycle. The Commission, therefore, stands ready to propose fiscal country-specific recommendations for 2024 including a quantitative requirement as well as qualitative guidance on investment and energy measures, that are consistent with the criteria set out in its reform orientations, while remaining consistent with those of the current legislation under the Stability and Growth Pact.
This would be the basis for the Commission’s monitoring of fiscal outcomes against the fiscal country-specific recommendations, starting with euro area Member States’ draft budgetary plans for 2024 to be assessed by the Commission in the autumn.
What is the state of play of the economic governance review?
The Commission published its orientations for a reform of the economic governance framework in November 2022 after an extensive consultation process.
Discussions on the revised fiscal framework are progressing. The fiscal elements of the proposal have been discussed at the Economic and Financial Committee, as well as at ministerial level at the Economic and Financial Affairs Council and, for issues specifically relevant to the euro area, at the Eurogroup. The Commission has also discussed its orientations with the European Parliament, the European Economic and Social Committee, the European Committee of the Regions, and other stakeholders.
There is agreement that the 3% and 60% of GDP reference values set in the Treaties should remain unchanged.
Views are converging on a number of other issues, including:
- that the proposed medium-term approach, while maintaining annual surveillance, is appropriate to ensure a sustained reduction in high debt ratios and that medium-term fiscal structural plans prepared by Member States would be the cornerstone of the revised framework;
- the need for greater incentives for investment and reforms, reflecting the lessons learned from the impact of the global financial crisis on investment and the significant investment needs for the green and digital transitions;
- that more effective enforcement of the rules is needed, including by retaining financial sanctions but lowering their amounts, while enhancing their reputational impact;
- that the existing rules for the opening and closing of a deficit-based EDP would remain unchanged, while the debt-based EDP would need to be reinforced;
- the need for an appropriate differentiation of fiscal efforts.
Further discussions are needed on operationalising these principles.
The Commission intends to table legislative proposals following the upcoming Economic and Financial Affairs Council and the European Council in March 2023.
What guidance is provided on the implementation of the excessive deficit procedure?
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 country-specific recommendations addressed to the Member States by the Council on 12 July 2022. The Commission is continuously monitoring Member States’ economic and budgetary situation, recalling also the Commission’s Opinions on euro area Member States’ draft budgetary plans, which called for taking the necessary measures within the national budgetary process to ensure that the 2023 budget is consistent with the country-specific recommendations adopted by the Council on 12 July 2022. The Commission will assess compliance with the deficit and debt criteria in accordance with the Treaty on the Functioning of the European Union as a part of the spring 2023 surveillance round.
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 outturn 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 are the next steps?
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. Updated guidance will continue to reflect the global economic situation, the specific situation of each Member State, progress on the discussion on the ongoing economic governance framework and policy debates in the Council. The development of the economic and budgetary outlook will be monitored closely and duly taken into consideration. Member States are invited to reflect this guidance in their stability and convergence programmes.
Communication on fiscal policy guidance for 2023
Communication on orientations for a reform of the EU economic governance framework
Source: European Commission
