Factbox-Main elements of fiscal reforms agreed by EU governments

Factbox-Main elements of fiscal reforms agreed by EU governments

By Jan Strupczewski

European Union finance ministers agreed on Wednesday changes to the EU's fiscal rules updating them to the post-pandemic realities of high public debt and the need for massive public investment to fight climate change.

Below are the main points of the new approach.

FOCUS OF THE RULES

The rules shift the focus from the annual deficit and debt to net primary expenditure every year - a fiscal indicator which measures those spending components under a government's direct control. On the basis of a debt sustainability analysis, the European Commission and the country concerned agree on a path for net primary expenditure for four years, to cut the debt and deficit to below the EU's limits of 3% and 60% of gross domestic product (GDP) respectively.

FOUR AND SEVEN-YEAR PLANS

The four years to bring down public debt through control of government spending can be extended to seven years if a government makes certain types of investments and reforms.

Reforms and investment in green and digital technologies and approved by the EU to pay out in cash from its post-pandemic recovery fund, if they include "ambitious reforms and investments, in particular with regards to economic growth and fiscal sustainability over the medium term" are enough to automatically extend the time.

SPEED OF DEBT REDUCTION

To make fiscal consolidation faster for countries that have high debt like Italy, Greece or France, the new rules set a minimum average annual amount of debt reduction.

Countries with debt above 90% of GDP must cut it by at least 1% of GDP a year. For countries with debt between 60% of GDP and 90% of GDP, the reduction can be slower at 0.5% of GDP a year.

This is much less ambitious than the previous, but unrealistically high requirement that every country should cut debt by 1/20 of the excess above 60% a year. But it is also more stringent than the original plan Commission proposal that any debt cut over four years would be enough.

SPEED OF DEFICIT CUTS

The upper limit for a budget deficit remains 3% of GDP, but the new rules introduce a "deficit resilience safeguard" - a margin below the 3% ceiling that would be used in planning the spending path, to make sure the government has room for manoeuvre even when something unexpected happens, without breaking the 3% EU limit. This margin is to be 1.5% of GDP.

The 1.5% of GDP deficit is now the new overall target for EU countries, replacing the previous concept of a medium-term objective (MTO) that countries were to aim for. For many countries that was a deficit of 0.5% of GDP in structural terms so a move to 1.5% now leaves them additional fiscal space.

If a deficit is above 3% of GDP, a government is put under an excessive deficit procedure (EDP)and must cut it by 0.5% of GDP annually.

Once the deficit falls below 3% of GDP, the size of the annual improvement will be 0.4% of GDP a year if a country has four years for it, and 0.25% if seven years, until it reaches the deficit of 1.5% of GDP.

This is slightly more lenient than the previous rules, which obliged governments to cut structural deficits by a minimum 0.5% of GDP a year until the budget is balanced or in surplus no matter whether the deficit was above or below 3%. The old rules also said a deficit in excess of 3% of GDP should be brought down below the ceiling again the following year, unless there are special circumstances. Now there is no such requirement.

To take into account ECB interest rates that are at record highs, until 2027 interest payments will be excluded from calculating the deficit cuts when a country has a deficit above 3% of GDP, leaving more money in national governments' coffers for investment.

ENFORCEMENT

To enforce the agreed spending path, the Commission will be able to launch disciplinary steps, that could end in fines, against a government that would exceed its spending by a certain amount in a given year, or by a certain amount cumulatively over the four- or seven-year period.

The size of the excess spending that would trigger the disciplinary procedure is 0.3% of GDP annually or 0.6% of GDP cumulatively when a country has debt above 60% and is also running a deficit.