Friday, July 19, 2024

Alternatives To The Deficit Ceiling Gain Weight

The European Commission has started a process of reform of fiscal rules with the aim of improving their functioning, a debate that is now taking its first steps and in which everything indicates that the public deficit will lose its current role. There are many experts in Spain who defend the abolition of the ceiling of 3% of the deficit in favor of alternatives more in line with the reality of the country.

The European fiscal rules have been suspended since March 2020, an exception that the European Commission has proposed to extend until 2022 to help alleviate the economic effects of the pandemic, which means, in practice, that no country will enter into the procedure of excessive deficit (EDP) or corrective arm whatever your fiscal situation, since there are no objectives to meet.

The complex reform of fiscal rules was already planned before the pandemic, although now it acquires more urgency given the large accumulated deficit and debt data
When fiscal rules are restored, foreseeably in 2023, everything indicates that they will be different from the current ones, very focused on the annual deficit figure -which cannot exceed 3% of GDP- and, to a lesser extent, at the top of debt – it must be kept below 60% of GDP – and the evolution of public spending.

The reform of the fiscal rules, which are considered complex and difficult to apply -especially in the preventive arm-, was already planned before the pandemic, although now it acquires more urgency given the bulky deficit and debt data accumulated by the countries .

The intention of the Commission is to accelerate the work in the second half of 2021 to have a proposal by the end of the year that, according to the first talks, could involve paying greater attention to debt and investment or strengthening the role of institutions. independent prosecutors such as AIReF to monitor fiscal strategies and debt sustainability.

Experts against the deficit ceiling
The experts consulted by EFE agree that the fiscal rules need a reform, since they have proven to be procyclical, that is, they tackle the imbalances derived from the crises with spending adjustments and tax increases that end up aggravating the crisis itself. Instead, they advocate moving the focus of the annual deficit to medium-term metrics, especially the evolution of public spending, in order to ensure that the instruments do not hinder economic growth.

The director of Coyuntura de Funcas, Raymond Torres, directly proposes abolishing the deficit ceiling of 3% of GDP, which in his opinion is “quite arbitrary” and ends up being countercyclical, and replacing it with “a structural spending rule.”

This new rule would only measure structural spending -which is independent of the cycle, such as pensions or the salary of civil servants-, which could not increase above a certain reference in the medium term unless structural or recurring income were also increased. .

In this way, it would not be necessary to make adjustments if a crisis increases the deficit on time, thus avoiding damaging the productive fabric, while expansion situations would cause a surplus, a “more rational from an economic point of view” but also “more complex metric. “.

Also the general director of the Institute of Economic Studies (IEE), Gregorio Izquierdo, advocates monitoring structural public spending as a way to correct the structural deficit in a manner compatible with economic growth.

However, it proposes this metric as a complement to the current rules that serves as a way to guarantee the sustainability of public accounts in the long term, something to which indicators such as the demand for reforms or an adequate measure of the fiscal pressure would also contribute.

The Government defends an in-depth reform to get out of a quantitative model that is difficult to apply and move towards more general recommendations depending on the circumstances of each country.
In the same sense, in a document published in October 2020, Fedea proposed incorporating into the reform a control of public spending, which should not exceed the economy’s potential growth in the medium term or the inflation target, a limit that would still be more restrictive for countries with debt greater than 60% of GDP or with a large deficit.

Likewise, experts agree that the important thing is that public debt is sustainable in the long term, beyond meeting a specific threshold, since it is an indicator that is the result of past decisions that cannot be corrected in a single exercise .

The Spanish Government has defended the need to reform the rules in depth to get out of a quantitative model that is difficult to apply and move towards more general recommendations based on the circumstances of each country that, at the same time, allow internal balance to be maintained.

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