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DG ECFIN
Improving fiscal policy in
the EU: ways forward
Klaus Regling
FBP - CPB seminar on ‘Economic and fiscal forecasts and the budgetary process
within the framework of the Stability and Growth Pact’
Brussels
1 February 2006
Slide 1
DG ECFIN
Improving fiscal policy in the EU
1. Why is an improvement of fiscal policy
in the EU needed?
2. Contribution of the 2005 SGP reform
3. Ways forward for ensuring the conduct
of sound fiscal policies in the EU
Slide 2
A large increase in debt levels
DG ECFIN
75
EUR-12
debt ratio, as a % of GDP
60
45
Germany
30
France
15
1975
1980
1985
1990
1995
2000
2005
Source: Commission services.
Slide 3
DG ECFIN
Government finances currently on a non sustainable path
Debt developments for EU-25 up to 2050 based on the 2004 SCPs
debt/GDP
200
175
150
125
100
60% reference value
75
50
25
2004
2008
2012
2016
2020
2024
2028
2032
2036
2040
2044
2048
Scenario 1: unchanged policy (structural balance remains at 2004 level)
Scenario 2: medium-term budgetary objectives of the 2004 SP/CP are met
Source: Commission services.
Slide 4
Lack of fiscal consolidation in good times
DG ECFIN
3
9
8
9
Number of Member States
with a deficit above 3% of GDP
2
3
1
5
3
6
5
3
1
1
3
3
0
0
Output Gap (lhs)
-1
-2
-3
-6
Fiscal consolidation
in bad times
Cyclically-adjusted balance (lhs)
-3
-9
Bad times,
timid consolidation
No consolidation in
good times
-4
-12
-5
-15
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source: Commission services.
Slide 5
DG ECFIN
Overarching objectives of fiscal
policy in the EU
1. Remove the deficit bias and promote policies that
ensure the sustainability of government
finances
2. Avoid the conduct of pro-cyclical policies
3. Improve the quality of government expenditure
Slide 6
The SGP reform – salient features
DG ECFIN
More economic rationale and room for judgement
•
Increased focus on fiscal efforts rather than only on
nominal results
•
New incentives for fiscal consolidation in good
times
•
More emphasis on debt and sustainability
Slide 7
DG ECFIN
The SGP reform - assessment
A rules-based framework relying on economic rationale and
judgement is expected to lead to better outcomes:
– Increased ownership of the framework in the Member States
– Increased reputational costs of resisting the rules of the Pact
– Straightforward provisions prevent abuses of the room for
judgement and safeguard the core function of the Pact
=> First experiences with the revised Pact are encouraging
Slide 8
DG ECFIN
Ways forward
Challenges for ensuring the conduct of sound
fiscal policies in the EU:
• Continue progress in the analysis of government finances
• Promote institutional settings at national level that
encourage governments to pursue sound policies
• Improve consistency and interactions between the national
framework for budgetary policies and the EU framework
Slide 9
DG ECFIN
Implementing adequate institutional
settings at national level
Adressing the deficit bias at its roots:
• Directly, by imposing constraints on the conduct of fiscal
policy (unbiased inputs, strong fiscal rules, delegation of
part of fiscal policy)
• Indirectly, by increasing reputational costs for the conduct
of unsound policies (independent analysis in the area of
fiscal policy)
Slide 10
DG ECFIN
Member States with strong medium-term expenditure rules
show a better adherence to multi-annual plans
Avge difference between planned and observed increase in
gov. expenditure over a 3-year period, % of GDP
2,5%
2,3%
FR
DE
2,1%
1,9%
1,7%
EL
NL
FI
1,5%
1,3%
SE
1,1%
0,9%
DK
0,7%
0,5%
2
3
4
5
6
7
8
Index of strength of the expenditure rule
Source: Commission services.
Slide 11
DG ECFIN
Implementing adequate institutional
settings at national level
Adressing the deficit bias at its roots:
• Directly, by imposing constraints on the conduct of fiscal
policy (unbiased inputs, strong fiscal rules, delegation of
part of fiscal policy)
• Indirectly, by increasing reputational costs for the conduct
of unsound policies (independent analysis in the area of
fiscal policy)
Slide 12
Conclusions
DG ECFIN
1.
Revised SGP rules are a good basis for better
fiscal policies
2.
Implementation will be key – judgement
should be used to increase the economic
rationale of decisions and recommendations
3.
Need to strengthen efforts to adress the deficit
bias at its roots
Slide 13