(Finance) – “An important aspect that is not addressed in the European Commission’s legislative proposals is the consideration of the appropriate fiscal stance for the euro area as a whole. The proposed framework of rules risks leading immediately, given that many countries have a debt exceeding 60 percent of GDP, to excessively restrictive policy indications for the euro area and for the EU, although to a lesser extent than in the Stability and Growth Pact. more effective in the euro area, it remains a priority to make progress towards establishing a common euro area fiscal capacity.” This is what the president of the Parliamentary Budget Office Lilia Cavallari in memory forhearing at the joint budget committees of the House and Senate on new economic governance of the European Union. “The main innovation of the new governance framework – underlines Cavallari – concerns the transition from uniform numerical rules for all member states to rules focused on debt dynamics and on medium-term structural budget plans (PSB) differentiated between countries. using the methodology developed by the PBO, some medium-term scenarios have been prepared which describe the evolution of the debt-to-GDP ratio and of the main public finance variables which are consistent with the approach outlined in the legislative proposals on the new EU governance” .
“In the hypothesis of unchanged policies from 2025, i.e. in the absence of budget adjustment, – highlights the president of the PBO – the debt to GDP ratio would show an increasing dynamic starting from 2026, reaching in 2041 a value of just over 171 percent of GDP (31.5 percentage points above the starting figure of 2024) in the basic scenario, and a value of just under to 181 percent of GDP (approximately 41 percentage points above the starting figure of 2024) in the unfavorable scenario. Considering the multi-annual budget adjustments consistent with the new framework of rules proposed by the Commission (which will start from 2025), the debt-to-GDP ratio would be on a continuously decreasing path with a high probability and considering unexpected shocks. According to the basic scenario, the adjustment in four years would allow for a more pronounced decline in the debt-to-GDP ratio (reaching 113.5 percent at the end of the projection period, in 2041, with a reduction of 26 percentage points of GDP) compared to an adjustment in seven years (reaching 116 percent, a reduction of 24 percentage points of GDP), mainly thanks to the more rapid decline in interest expenditure as a share of GDP. In the unfavorable scenario, with an adjustment period of four years the debt-to-GDP ratio would reach a level of around 115 percent in 2041, while with an adjustment period of seven years it would be just below 120 percent.” .
“To allow the reduction of debt in relation to GDP observed in the basic scenario, – continues Cavallari – net debt should reach 1.7 percent of GDP at the end of the adjustment plan in four years (i.e. by 2028), and 2 percent at the end of the plan of adjustment in seven years (i.e. by 2031). For the three-year period 2024-26, the programmatic evolution of the deficit in relation to GDP established in the NADEF, if effectively achieved, would be compatible with the indications of the proposal to reform the EU economic governance system in the case of a budget adjustment in seven years but would require a larger fiscal effort to be in line with a four-year adjustment plan in the unfavorable scenario. At the beginning of the horizon of the projections presented, the adjustment plan that guarantees convergence towards the medium-term objective (MTO) envisaged by the current rules would be more restrictive than the seven-year adjustment plan and less restrictive than the in four years: both the overall budget balance and the primary balance consistent with the MTO rule remain in an intermediate position compared to the other two scenarios. Subsequently, the balances consistent with convergence towards the OMT are placed at higher values than in the other two scenarios.
In the hypothesis of convergence of the structural balance towards the MTO, the debt-to-GDP ratio would fall between the technical trajectory with budget adjustment in four years and the one resulting with an adjustment in seven years in the first part of the projection horizon, and then move below both.”
“The emphasis placed on the sustainability of public finances in the medium term and the request that the PSB contain commitments on reforms and investments – underlines Cavallari – provides an incentive to strengthen the quality of budget policy at national level. The choice to focus on a single annual policy objective, i.e. the growth of net primary expenditure financed by national resources, allows for a greater predictability and transparency of budget rules. Referring to net primary expenditure will not affect the overall size and composition of Member States’ budgets; the adjustment plans may include both discretionary reductions in expenditure and discretionary increases in revenue”.