Negotiations on reforming the Stability and Growth Pact and its rules have gained momentum. The European Commission, paused since the covid outbreak in early 2020, announced a renewed engagement in 2024, with or without reform. Governments across Europe are being asked to submit stability and convergence plans to Brussels before the end of April. This exercise serves as a transition where member states adjust public spending policies in a coordinated way, presenting multi-year plans that detail deficit and debt adjustments.
The step back into the reform process points to continued attention on the deficit ceiling and debt targets. The 3% deficit limit and the 60% debt ratio remain reference values, and the Commission will reassess compliance with these thresholds. European governments, including Spain under Prime Minister Pedro Sánchez, must outline in their programs how these reference values will be respected, both for deficits and debt levels.
If deficits arise, plans must ensure that budget deviations stay below 3% of GDP for the period through 2026 at the latest. On the debt side, plans should provide a credible and sustained reduction, especially for countries facing significant or moderate debt challenges. In Spain’s case, debt should be kept at prudent levels over the medium term. The Commission’s autumn forecasts project Spain ending 2024 with a 3.6% deficit and 112.1% debt. At present, given high macroeconomic and budget uncertainty, Brussels indicates that excessive deficit procedures will stay unopened this year, though there is an opening for potential action starting in spring 2024.
energy measures
The new guidance suggests gradual energy support for households and businesses to cushion the economic and social impact of the energy crisis. Brussels estimates this support represented about 1.2% of GDP in 2022 and nearly 1% in the current year. If wholesale energy prices stay stable and lower energy costs feed through to retail prices as projected, the government’s energy support measures should be phased out in 2024, with the savings helping to reduce public deficits, according to the Commission.
In the meantime, if energy prices rise again and suspending aid entirely is not feasible, Brussels urges targeted measures to protect vulnerable homes and businesses. This approach aims to shrink financial costs, promote energy savings, and allow the economy to adapt gradually and sustainably for a limited period. This message has been reiterated multiple times to encourage member states to improve public finances and free resources to support the double transition, as stated by Commissioner Paolo Gentiloni.
Review in May
The European Commission plans to update the 2024 fiscal guidelines by May 2023 at the latest, presenting country-by-country recommendations after reviewing stabilization and convergence plans submitted by governments by 30 April, based on net primary expenditure. In this exercise, member states will propose their own fiscal means, which will then be examined and evaluated by community technicians. Gentiloni noted that recommendations will include qualitative guidance on investment and energy measures, along with differentiated quantitative requirements aligned to each member state’s debt sustainability challenges.
“This is a delicate balancing act, because it is crucial to move toward a reliable and robust framework”, he explained, highlighting elements that could grant greater flexibility within financial governance in light of tax reform. The Stability and Growth Pact rules, currently under negotiation by the 27 members, with Brussels proposing legislation this spring, may see the 2024 guidelines acting as a bridge between past practices and potential future applications, according to Vice President Valdis Dombrovskis.