Healthy public finances contribute to macroeconomic stability and support monetary policy in maintaining stable prices at low interest rates. Both effects are conducive to private investment and savings. By reducing public debt and the interest burden, this also creates room for a reduction in distortionary taxes and an increase in productive public spending.
The economic and financial crisis badly weakened public finances in EU countries. Significant efforts in recent years and an improved economic outlook are bearing fruit and Member States have succeeded in reducing deficits and stabilising debt levels.
It is important that governments secure long-term control over deficit and debt levels.
More about this: Autumn European Economic Forecast
The quality of public finances is also very important. Particular attention should be given to:
Fiscal policy should seek to strike an adequate balance between tackling historically-high debt levels and supporting economic growth. EU countries coordinate their economic policies through the European Semester.
Sustainable public finances and smaller public debt burdens are important to ensure that Member States have sufficient fiscal space to cope with adverse macroeconomic situations. They are also necessary to cope with public spending related to population ageing. Identifying fiscal sustainability challenges and their causes allows supporting the design of appropriate policy responses.
After peaking at almost 89% of GDP in 2014, a downward trend in the EU's public debt over GDP started in 2015 and is projected to continue till 2024, reaching 79,5% of GDP by that year, and stabilising around this level until 2026. Public debt over GDP varies significantly across EU Member States and is projected to remain high in a number of countries.
On the other hand, long-term age-related public expenditure projections show that population ageing poses a challenge for public finances in the EU. Age-related expenditure will increase by almost 1 ½ % of GDP by 2060 (1.3% for the EU; 1.4% for the EA), mostly driven by rising health care and long-term care expenditure.