Countries that need more time in the near future to correct their excessive government debt levels (and also the deficit, if any) will have to commit to more structural reforms and specific investments to be discussed with the European Commission (EC). negotiated within the framework of the new Stability Pact (proposed by Brussels), which should enter into force in a few years, in 2024 or later.
Yesterday, during a debate organized by the Commission Representation in Lisbon, João Nogueira Martins, Head of Unit in the Directorate-General for Economic and Financial Affairs (DG ECFIN)explained that the proposal for the new Stability Pact will essentially be based on an “observable” indicator and that “governments monitor” annual net government spending.
This will act as a brake/accelerator through which governments will have to commit to a budget plan that will last four years (the political period of a legislature can be five, if applicable), and it will be through this limit of expenditures that will see if the countries manage to push the national debt too high within a period of ten years after the end of that plan.
The rule to reduce excess debt to more than 60% of gross domestic product for 20 consecutive years should go, as it was considered “unrealistic” and came with high political costs, but with the new spending tool it is expected that governments will be able to elaborate more. credible plans for adjustment of government accounts.
But there are challenges. What if, at the end of four years of its new medium-term budgetary plan, a country still cannot prove that the debt is on a sustainable path and is therefore decreasing over the next ten years? In the EC’s proposal, the answer is: give more time (another three years), but that comes with “counterparts”, such as more structural reforms and public investment recommendations, which are no longer under the total control of governments. This will have to be negotiated with Brussels.
Therefore, the rate of annual net government expenditure (an indicator from which interest expenditure and “cyclical unemployment expenditure” are excluded) determines the reduction of debt, the main objective. And by the way, that will help bring the deficit below 3% of GDP. This limit does not disappear from the proposed new pact and remains of great importance.
“In case of non-compliance with the 3% of GDP deficit reference value, the procedure (so-called deficit-based EDP) would remain the same. It is a consolidated part of the process of EU fiscal surveillance, which is allowed to effectively influence fiscal behavior and is well understood by policy makers and the general public,” explains the EC.
During this Monday’s debate, the head of DG ECFIN said that the aim is to “verify whether or not there is a constant endogenous debt reduction that can withstand certain adverse shocks”.
“It is to know whether the situation that the governments are going to commit to and foresee in the next four years of the plan will lead us to a continuous reduction of debt over the next ten years,” he began by saying.
This, of course, depends on the state of the country’s accounts. The EC says its proposal for the pact, whose compliance is reviewed every four years, is intended to give countries more flexibility, but will come with “counterparts”.
“This four-year period can be extended for a further three years if necessary if countries – and we are talking about those who are highly indebted, we are not talking about Bulgaria or Estonia – need more time to achieve deleveraging. to establish a continuous path resistant to adverse shocks”.
“That is, debt sustainability does not begin to measure in 2022, but taking into account the four years of the plan and the three additional years” and “to get this extension of the plan which of course leads to countries If we have more room for maneuver, we should get something in return, which is more structural reforms and greater public investment that serves to increase the country’s growth potential,” summed up João Nogueira Martins.
The end of the ‘hot potato’ for the government that follows?
Another explicit idea in the EC’s proposal for the reform of the Pact and economic governance of the European Union is that by insisting on and putting forward a four-year plan, it commits governments to better off political cycles to align with budgetary cycles. , which guarantees that they do not leave problems for subsequent governments to solve.
“We must give each country the means to define its own objectives. And each country must prepare a national budget plan, with some elements of structural reforms, which should take at least four years,” said the European Union’s head of unity . Directorate General.
“These four years do not appear by chance, it is not a number that comes out of a roulette wheel. It is linked to the political processes of each country. We do not want to ask a government today to prepare a compromise for the government that will be compromised tomorrow elected”, that is, “the goal is to have national plans with a four-year horizon that are linked to the political cycle itself”.
We want “each government to set its own targets, committing to respecting them, and we don’t just give targets to the government that comes after,” the official reiterated.
Compliments and many doubts
The debate was attended by specialists in the field of accounts and public policy.
The most critical wash Ricardo Paes Mamede, Professor of Political Economy at ISCTE🇧🇷
In this EC proposal “I see positive aspects”, such as “more realism”, as a return to the old rules, which are still in force, would be disastrous.
This statement also seems “not treating all government spending equally is a positive concern”.
But there are minuses, “limitations”. For the ISCTE professor, there are still “objectives that seem designed not to be met” and references to “structural reforms as if everyone agrees”. “The reforms that are the responsibility of governments”. The EC should not interfere directly with this, that is the intention.
In addition, in the expenditure section, the Commission “provides pensions and that makes me shiver”.
Carlos Marinheiro, of the Public Finance Council (CFP)also has some fixes, starting with the apparent simplicity in calculating the basic indicator: net cost.
From this indicator we will have to extract “interest, part of community financing, the cyclical component of unemployment benefit expenditure, which is not observable, plus discretionary measures on the revenue side”.
“How is this calculated? I think we have to gamble a little bit on this problem of calculating the indicator,” the CFP economist defended.
The central bank was also present. Cláudia Braz, head of the public finance department of Banco de Portugal (BdP)considered that “the EC proposal is well-intentioned and comprehensive”, the elements “contain structural reforms and investment, which is quite positive” and also “maintain the references of 3% for the deficit and 60% for the debt”
But he also criticizes the brake/accelerator that can serve as the basis for the new Pact. “This spending rule is very complicated” and “it will be at the end of the four years of the plan that the debt will have to follow a downward trajectory and there may be another three years of extension”. “I have doubts about the ambition of the plans”, “Governments are what they are”, the headline of the BdP shot.
Luís Reis Ribeiro is a journalist for Dinheiro Vivo
Source: DN
