The (perhaps) last State budgets without fiscal rules

MADRIDThose of 2023 – if they go ahead – may be the last general State budgets approved without European (and also Spanish) fiscal rules. “They can”, because in fact these rules were supposed to return next year, or this was the initial intention of the European Commission. The war in Ukraine, however, has forced Brussels to change its plans and extend, again, the temporary suspension of tax rules, approved exceptionally with the covid-19 pandemic. Now, the year marked in red on the calendar is 2024. The unknown, however, is whether the tax pact will return as it was known or whether the European Commission will decide to touch some rules of the game which, in the eyes of some countries, they can be neither homogeneous nor as strict as until now.

Having these tax rules suspended has involved leaving in stand-by the European Stability and Growth Pact and, therefore, the public deficit and debt targets. This has helped governments not to have to tighten their belts when thinking about spending, especially in a context of crisis. From the moment Brussels activated the so-called “safeguard clause” countries could break the rules.

However, aware that this free bar will end – as the European Commission has said – the member states have not stopped thinking about “fiscal prudence”, which has been referred to so often by the Minister of Finance, María Jesús Montero, when designing the public accounts. For this reason, the State budgets for 2023 will be marked by “budgetary responsibility”. As this newspaper explained, the spending ceiling approved by the Spanish government is a “record” but “will not prevent reducing the deficit”. The reason: if the expenditure is adjusted to the current inflationary context, it is lower.

The European Union, however, is also clear that it does not want to repeat the havoc caused, especially in the periphery, by looking closely at these rules after the financial crisis of 2008 and the subsequent debt crisis that affected the euro zone between 2010 and 2014. Brussels intends to address the debate this autumn and pave the way for 2024. Spain, one of the countries hardest hit by the design of these tax rules, heads the list of member states that do not they want to return to the guidelines of the past. Paradoxically, it has found a traditionally opposed partner in economic matters: the Netherlands. In arm, they will ask for more flexibility.

However, Germany has also been open to negotiating the reform of the tax pact. A no small gesture if you take into account that even today it resonates the “we must stop living beyond everyone’s means” that Angela Merkel pronounced in 2011. At the time, the German chancellor issued a warning, precisely about the danger, in the eyes of Berlin, that some countries did not comply with the fiscal rules. Historically, the German country has always been very belligerent with fiscal stability. In fact, Merkel was betting on being able to bring member states before the Court of Justice of the European Union if they did not comply with the European Stability and Growth Pact. But neither that government nor the context is what now marks Germany.

The coalition led by the social democratic party, with the greens and the liberals as partners, has made public a proposal to modify the rules. On the one hand, they assume that the requirements on the reduction of public debt may lead to more “adjustments” of the account for some countries. In other words, austerity in those where the public debt is far above what is set by the rules. At the same time, however, Olaf Scholz’s government makes it clear that “flexibility must go hand in hand with clearly defined limits and improved mechanisms to enforce the rules”, the text begins.

3% deficit and 60% debt

What does the European fiscal pact say? This limits the level of debt that an EU state can accumulate to 60% of gross domestic product (GDP), while the deficit must be no more than 3% of annual GDP. At the moment, Spain, like many other countries, is breaching these limits. The State closed 2021 with a deficit of 6.8% of GDP. The government estimates that this 2022 will fall to 5%, while it places it at 3.9% in 2023 and at 3.3% in 2024. It would not be until 2025 that it would be below 3%.

The gap, however, between what the European rules say and what happens in the State is marked by the public debt. According to the latest forecasts of the central government, this will remain above 100% of GDP until 2025, which would reach 109.7%. In 2021, the State ended up with a public debt of all administrations of 118.4% as a result of spending to deal with the pandemic. It remains to be seen, then, whether these latest crises will modify, or not, some rules that were designed 30 years ago and that in fact have always been in the crosshairs of some economists, especially those with a more progressive and favorable tendency to a more interventionist role of the state on the economy.

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