The crisis and the consequent fiscal difficulties experienced by some EU countries have exposed the weaknesses of EU budgetary surveillance. In order to capitalise on the lessons learnt and prepare the EU economies to face the future with stronger public finances, the Commission has proposed a set of reforms to budgetary surveillance. At the same time, large increase in debt has meant that the issue of sustainability has emerged as a key concern.
This year's edition of the Report on Public Finances reviews the proposed reform of the EU budgetary surveillance and sets out how Member States' fiscal policies have evolved in the wake of the financial and economic crisis. It then assesses the relationship between fiscal rules and the spreads on government debt before moving on to present new methodologies to be used by the EU in its sustainability analysis.
- The first part reports on developments in the public finances, highlighting the rise in deficits and debt across the EU and the beginning of the consolidation process. It documents the implementation of EU budgetary surveillance.
- The second part discusses the various components of the proposed reform which is currently awaiting final approval in the Council and the European Parliament in detail, looking at the changes to the Stability and Growth Pact (SGP). It focuses on (i) the reform of the preventive arm of the Pact with the introduction of an expenditure benchmark and of sanctions for euro area members; (ii) the reform of the corrective arm with the introduction of a debt rule and the reinforcement of existing sanctions; and (iii) the proposed new directive on fiscal frameworks.
- The third part analyses relationship between national fiscal frameworks and the spreads on sovereign debt showing that the quality of fiscal rules affects market expectations, with weak rules leading to higher spreads over bunds.
- Finally, in the fourth part, the report considers how the EU's current sustainability analysis can be improved with additional methodologies. First it presents methodologies which assess the risks posed by the financial sector and by macro-financial imbalances to sustainability. Then, fiscal reaction functions and the effect of tax increases on revenue streams are incorporated into standard analysis.