New EU fiscal rules approved by MEPs

This article is brought to you in association with the European Parliament.

• New provisions to foster investment, factor in social convergence, and increase national commitment to plans
• The updated rules set minimum reduction of average deficit and debt
• Time to achieve objectives in national plans may be extended, and deviation from the plan would be allowed in exceptional circumstances
• First national plans outlining expenditure, reforms and investments to be prepared by September 2024

MEPs approved a revamp of EU fiscal rules making them clearer, more investment friendly, better tailored to each country’s situation, and more flexible.

The new rules, approved on Tuesday, were provisionally agreed upon between European Parliament and member state negotiators in February.

Focus on investments

MEPs significantly beefed up the rules to protect a government’s capability to invest. It will now be more difficult for the Commission to place a member state under an excessive deficit procedure if essential investments are ongoing, and all national expenditure on the co-financing of EU funded programmes will be excluded from a government’s expenditure calculation, creating more incentives to invest.

Ensuring credibility of the rules – deficit and debt reduction mechanisms
Countries with excessive debt will be required to reduce it on average by 1% per year if their debt is above 90% of GDP, and by 0.5% per year on average if it is between 60% and 90%. If a country’s deficit is above 3% of GDP, it would have to be reduced during periods of growth to reach 1.5% and build a spending buffer for difficult economic conditions.

More breathing space

The new rules contain various provisions to allow more breathing space. Notably, they give three extra years over the standard four to achieve the national plan’s objectives. MEPs secured that this additional time can be granted for whatever reason Council deems appropriate, rather than only if specific criteria were met, as initially proposed.

Improving dialogue and ownership

At the request of MEPs, countries with an excessive deficit or debt may request a discussion process with the Commission before it provides guidance on the expenditure path This would give more opportunity for a government to make its case, especially at this crucial point in the process. A member state may request that a revised national plan be submitted if there are objective circumstances preventing its implementation, for example a change in government.

The role of the national independent fiscal institutions -tasked with vetting the suitability of their government’s budgets and fiscal projections- was considerably strengthened by MEPs, the aim being that this greater role will help build national buy-in to the plans further.

Quotes by the co-rapporteurs

Markus Ferber (EPP, DE) said, “This reform constitutes a fresh start and a return to fiscal responsibility. The new framework will be simpler, more predictable and more pragmatic. However, the new rules can only become a success if properly implemented by the Commission.”

Margarida Marques (S&D, PT) said, “These rules provide more room for investment, flexibility for member states to smooth their adjustments, and, for the first time, they ensure a “real” social dimension. Exempting co-financing from the expenditure rule will allow new and innovative policymaking in the EU. We now need a permanent investment tool at the European level to complement these rules.”

The texts were adopted as follows:

Regulation establishing the new preventive arm of the Stability and Growth Pact (SGP): 367 votes in favour, 161 votes against, 69 abstentions;

Regulation amending the corrective arm of the SGP: 368 votes in favour, 166 votes against, 64 abstentions, and

Directive amending the requirements for budgetary frameworks of the

Member States: 359 votes in favour, 166 votes against, 61 abstentions.

Next steps

The Council must now give its formal approval to the rules. Once adopted, they will enter into force on the day of their publication in the EU’s Official Journal. Member states will have to submit their first national plans by 20 September 2024.

Background – how the new rules will work

All countries will provide medium-term plans outlining their expenditure targets and how investments and reforms will be undertaken. Member states with high deficit or debt levels will receive pre-plan guidance on expenditure targets. To ensure sustainable expenditure, numerical benchmark safeguards have been introduced for countries with excessive debt or deficit. The rules will also add a new focus, namely fostering public investment in priority areas. Finally, the system will be more tailored to each country on a case-by-case basis rather than applying a one-size-fits-all approach, and will better factor in social concerns.