BRUSSELS (Reuters) - The European Fiscal Board on Wednesday proposed a radical simplification of the European Union’s highly complex fiscal rules to help make public finances more sustainable while stabilising economies throughout business cycles.
The proposal, requested by the European Commission, will form the basis of EU finance ministers’ discussions on Saturday at an informal meeting in Helsinki and contribute to the Commission’s own review of the rules at the end of the year.
The EFB, an independent advisory body to the EU executive arm, said the elaborate rules should be boiled down to only a medium-term limit on public debt, which the EU treaty sets at 60% of gross domestic product.
Countries that have debt above that ceiling would have to keep net government primary spending, which is expenditure less interest payments on public debt, at or below the rate of the economy’s potential GDP growth, which is the rate of growth that does not trigger higher inflation.
“The proposed reform would significantly reduce most of the sources of complexity,” the EFB report said.
To avoid reliance on fluctuating annual data, the ceiling for the net expenditure growth would be set for three years, after which it would be recalculated.
The ceiling could be abandoned based on a general escape clause triggered by the judgement of non-EC fiscal institutions, including a more independent European Commission economic department.
The EFB argues that using the net primary expenditure rule would automatically stabilise economies. During downturns, when growth is below potential, spending would be higher than growth, while during good times, when actual growth exceeds potential, spending anchored at potential would be lower than growth.
EU fiscal rules, called the Stability and Growth Pact, were first outlined in 1997 to put limits on borrowing in a economic union of countries that share a currency, the euro, but retain sovereignty on government debt and deficits.
After modifications in 2005, 2011 and 2013, the rules have become so complex that the Commission, which is the guardian of EU laws, each year publishes an almost 100-page handbook to explain how they work, along with many exemptions and exceptions.
The existing rules cap the headline budget deficit at 3% of GDP and oblige governments every year to cut their structural deficit, the budget shortfall excluding one-off revenues and spending and the effects of the business cycle, until they reach balance or surplus.
For countries with debt above 60% of GDP, the existing rules set a path for debt reduction that is 1/20 of the excess above 60% every year, measured as an average over three years.
They also employ the expenditure benchmark that limits government spending to below the rate of potential growth.
The EFB also proposed that instead of sanctions for not meeting EU fiscal rules - a measure that has so far never been applied to any country despite ample grounds - it would be better to use an incentive.
Countries that play by the new rules would as a reward get access to the euro zone’s about-to-be-created budget that would finance investment and perhaps later also perform a stabilising factor during economic downturns.
Reporting by Jan Strupczewski; Editing by Dan Grebler