Commission: EU countries should focus on net expenditure, cut debt over 4 years

The European Commission proposed on Wednesday that, under a reform of the EU’s fiscal rules, governments should ensure public debt falls over four years and stays on a downward path for a decade afterwards.

The proposal, which sets no numerical target for how much the debt should fall, is likely to disappoint the EU’s biggest country Germany, which wanted to set a 1% of GDP minimum annual debt reduction target for each of the EU’s 27 countries.

The debt reduction would be the outcome of a four-year plan of reforms, investment and fiscal measures that would be agreed individually by the Commission and each government and target annual net expenditure as the key operational indicator.

Governments could get more time to reduce their debt and deficit levels, for instance seven years, if they implement reforms that increase fiscal sustainability, boost growth or invest in areas that are EU priorities like the transition to a green and digital economy, social rights or in security and defense.

The overall debt reduction goal over four years would replace the current rule under which governments must cut debt every year by one-twentieth of the excess above 60% of GDP – a requirement that is seen as far too ambitious for high-debt countries like Italy, Greece or Portugal.

Under the Commission proposal, countries with public debt above the EU’s ceiling of 60% of GDP would be allowed to raise their annual net expenditure, which excludes one-offs, cyclical unemployment spending and debt servicing costs, by less than the medium-term output growth, to make sure debt falls.

The government deficit, like in existing rules, will have to stay below 3% of GDP. If it is above that ceiling, it will have to be cut by 0.5% of GDP every year until it is below the limit.

“And no heel-dragging, no backloading: member states will not be allowed to push back fiscal adjustments to a later date. This also applies to carrying out required reforms and investments,” Commission Vice President Valdis Dombrovskis said.

To make sure governments do not postpone cutting the deficit and debt to the end of the agreed period, especially if it is extended to seven years, they would be required to implement four-sevenths of the agreed adjustment by the end of the basic four-year period.

The deficit reduction, just like the debt reduction, would have to be achieved over the four-year period and measures used to achieve it would have to ensure that the deficit stays below 3% for 10 years afterwards without any additional steps.

The Commission’s proposal is the fourth revision of the EU fiscal rules, called the Stability and Growth Pact, since the creation of the euro currency. The rules are designed to underpin the value of the euro by limiting government borrowing.

The new rules are to replace the existing ones, which have been suspended since 2020 because of the Covid-19 pandemic and the challenge of fighting climate change and the war in Ukraine, but which are to be reinstated from the start of 2024.

The Commission proposal will now have to be discussed by EU governments and negotiated with the European Parliament with a view to an agreement later in 2023. [Reuters]