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Public finances in the EU

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.

  • Maintaining healthy public finances

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.

Current situation:

  • In 2016 and 2017, economic activity should be on the rise in all Member States with an acceleration expected in 2017 in most of them
  • In the EU, GDP growth is forecast to rise from 1.9% in 2015 to 2.0% in 2016 and 2.1% in 2017
  • The deficit-to-GDP ratio for the EU as a whole is forecast to decline to 1.6% in 2017 from a forecast 2.5% this year, and to 1.5 in the euro area
  • The public debt-to-GDP ratio in the EU is expected to fall to 85.8% in 2017 from 87.8% expected this year, whereas euro area’s debt-to-GDP ratio is forecast to fall from its peak of 94.5% in 2014 to reach 91.3% in 2017

More about this: Autumn European Economic Forecast

The quality of public finances  is also very important. Particular attention should be given to:

  • How taxation is designed and collected to make it more efficient
  • Where expenditure is focused and prioritising productive investment in government
  • Improving the countries' fiscal governance  to allow growth-enhancing policies. A database provides details on the EU Member States' fiscal governance

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.

 

Public finances in the Economic and Monetary Union

Sustainable public finances

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.

Public finances in the Economic and Monetary Union

More about sustainable public spending

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