The spread of the coronavirus and the measures taken against it have caused a sharp contraction in economic activity, which has led to a deterioration in the balance of public accounts due to both the decrease in revenues and the increase in expenses. In this context, it was decided to suspend the fiscal rules established within the framework of the Stability and Growth Pact (SPEC), which, if adhered to, would significantly limit the ability of governments to react. These fiscal rules imply a commitment to keep the public deficit below 3 percent of GDP and place the public debt at values below 60 percent of GDP. Countries exceeding these thresholds are obliged to comply with the recommendations adopted by Ecofin (the meeting of European Union Ministers of Economy and Finance), adjusting public expenditures and revenues to fall below the limits. If they achieve this, they face the possibility of having to impose more regulations and even face economic sanctions.
Although it was always understood that the suspension of fiscal rules would be temporary, there was no choice but to continue it as Russia’s invasion of Ukraine jeopardized the fragile economic recovery that had just begun. It was decided that fiscal rules would not be reintroduced until 2024, as monetary policy had already responded to inflationary tensions by adopting a more contractionary tone. All the while, debate had already arisen as to the pace to be followed to collect them, and even the possibility was evident. was raised to set new thresholds. The fact that various countries were in very different situations in terms of reference values made agreement difficult.
As can be seen in the attached graphs, the position of EU countries is quite variable. There are those with high ratios of public debt to GDP, such as Italy and Greece, those with very low ratios, such as the Netherlands and Denmark, while countries such as France, Spain and Belgium are in the middle position. In the early years of the period represented by almost everyone (especially Ireland and Spain), there was an increase in the level of relative public debt, in the following years there was a decrease, in some countries a more moderate and in others a more pronounced (with some exceptions) stability, such as Greece, Italy or France. like). What can be observed in almost all of the countries represented in the chart is the increase in the ratio in 2020 as a result of two factors: first, simply arithmetic (the contraction experienced by the denominator of the debt/GDP ratio as a result of the health crisis caused by the coronavirus); The other is about the deterioration of public finances due to the increase in public expenditures and the decrease in tax collection due to the impact of Covid-19 on the economy. In 2022, some countries reduced their relative public debt levels to levels close to or even lower than 2019 levels, while others were still above them.
Different economies’ positions on the mismatch between public revenue and expenditure (the variable that ultimately feeds the public debt) are equally variable. Both recorded and structural public deficits are shown in the accompanying chart. The latter is an estimate that is unrelated to the cyclical behavior of the economy and is made using an econometric procedure to determine the public account balance at which governments must take action to achieve permanent budget balances (regardless of whether a favorable situation would make an additional contribution). tax revenues or a recession causes an increase in some public expenditures). In 2022, almost all countries will reach a structural public deficit similar to that recorded in reality, with two exceptions where the cyclical behavior of the economy helps reduce the imbalance: Ireland had a surplus in its public accounts despite its structural structure. the balance is negative by more than two percentage points of GDP, and Italy, where the registered deficit improves the structural deficit by more than one percentage point. Structural public deficit net interest is also represented, which logically presents a lower imbalance, especially in more indebted countries such as Italy, Spain or Greece.
Looking at the data, one should not be surprised by the positions defended by various governments at the last Ecofin meeting held a few days ago. Countries with lower deficits, such as Germany, the Netherlands or Denmark, advocate faster adjustment, while those with higher structural deficits, such as France or Spain, demand a slower pace if the countries commit to reforms that will strengthen the budget. The competitiveness of their economies. Or, in other words, they argue that faster regulation might require cuts to some public expenditures for this purpose, so it might be advisable to do so more slowly. In fact, some countries go so far as to recommend that the most indebted countries put their budget deficits at around 1.5% of GDP; This means reducing the limit for them to half of the limit set in the SGP.
The actual size of the deficit to be used is a matter of debate because, as mentioned before, the structural deficit is the result of a statistical estimation that can be carried out using different methods and can lead to different results. There are also countries, such as Italy, that propose excluding debt interest from the deficit figure when assessing the effort made, because it is not possible to significantly reduce the budget imbalance in terms of interest rates for the most indebted. high (there is a possibility that the evolution of this substance will “eat up” a large part of the results obtained in others). There are also states that argue that proper application of Next Generation funds allows for an extension of the compliance period.
Final details could be finalized shortly before Christmas Eve, following a meeting of heads of state and government scheduled to last several days. The determination of reference thresholds, deadlines or the possibility of some policies being excluded from the deficit calculation, thus giving governments more margin to implement them, will be decisive in the coming period. Description of upcoming public revenue and expenditure policies. Or the same thing… for tax increases and/or spending cuts that may (or may not) come.