The preventive arm of the Stability and Growth Pact aims to ensure sound budgetary policies over the medium term by setting parameters for Member States' fiscal planning and policies during normal economic times, while taking into account the ups and downs of the economic cycle.
To keep governments on track towards meeting their commitments to pursue sound fiscal policies and ensure healthy underlying budgetary position over the economic cycle, each EU Member State is set a budgetary target, known as a Medium-Term Budgetary Objective (MTO).
MTOs are defined in structural terms. This means that they take into consideration business cycle swings and filter out the effects of one-off and other temporary measures.
All Member States are expected to reach their MTOs, or to be heading towards them by adjusting their structural budgetary positions at a rate of 0.5% of GDP per year as a benchmark.
Due consideration is given to the economic situation as well as the sustainability conditions. Member States with excessive and potentially risky debt burdens are expected to make faster progress and all countries are generally required to do more when economic conditions are favourable, so as to have more flexibility when they are tough. By the same token, the required pace of adjustment is reduced when economic conditions are unfavorable.
MTOs are set to ensure sound fiscal health. They take into account the need to achieve sustainable debt levels while at the same time ensuring governments have enough room for manoeuvre and a safety margin against breaching the EU’s fiscal rules.
MTOs are updated every three years, or more frequently in the case a Member State has undergone a structural reform significantly impacting its public finances.
The expenditure benchmark is a rule which contains the growth rate of government spending at or below a country’s medium-term potential economic growth rate, depending on the country's position with respect to the MTO. Under the rule, spending increases beyond this rate must be matched by additional discretionary revenue measures. The expenditure benchmark complements the MTO by putting growth in net expenditure on a sustainable path and therefore helping to move towards or maintain the MTO itself.
The expenditure benchmark was introduced as part of the 2011 reforms ("six-pack").
The Commission and EU governments assess whether Member States have met (or progressed towards) their MTOs and complied with the expenditure benchmark and whether they are likely to do so in the future by evaluating documents known as ‘Stability Programmes’ (for those Member States that use the euro as their currency), and ‘Convergence Programmes’ (for those that use their own currencies).