AIReF proposes that each Government commit to a spending path and a debt anchor at the beginning of the legislature

The Budgets of each year must be adjusted to fulfill said commitments.

AIReF proposes that each Government commit to a spending path and a debt anchor at the beginning of the legislature

The Budgets of each year must be adjusted to fulfill said commitments

MADRID, 21 Oct. (EUROPA PRESS) -

The Independent Authority for Fiscal Responsibility (AIReF) has launched this Friday its proposal for the reform of European fiscal rules, in which it proposes that each incoming government commit to Brussels a fiscal trajectory at the beginning of the legislature, establishing a specific debt anchor for the country and an expenditure path derived from it for the entire mandate.

This path, based on debt and spending and not on the deficit, must be approved by Parliament and the community authorities and would be the binding reference for the following four years. However, it could be modified in exceptional circumstances by activating an escape clause.

In the coming weeks --probably on October 26 or November 9-- the European Commission is expected to make a proposal on the reform of the rules of the Stability and Growth Pact that limit the public deficit and debt of the States members and that were deactivated due to the pandemic and are still suspended due to the economic impact of the war in Ukraine and the rise in prices.

AIReF has detected some problems and drawbacks of the current European fiscal framework that "has not been enough" to design "stable and predictable" national fiscal policies in the different countries. In fact, in Spain the independent body points out that the public debt has reached levels not seen before in "times of peace".

In addition, for AIReF, the current sanctioning mechanism for breaches of the rules by countries "has not worked" and has not even been applied for different reasons throughout its validity. From the organization, they consider that this economic sanctioning framework should be eliminated --although they do not believe that the Commission will completely renounce it--.

AIReF's proposal --which is compatible, in any case, with the objectives of the budgetary stability law currently in force in Spain and has been discussed with the Treasury at a technical level-- would go through establishing a debt anchor taking into account the starting levels (present), the historical evolution of the ratio (past) and the trend projections of public income and expenditure (future).

Once the debt anchor is derived, its implications for fiscal policy in the short and medium term would be expressed through a path of primary spending (including items such as spending on pensions, but assessing whether or not to add spending on unemployment cyclical), taking into account the net of additional income measures.

In this way, in a certain way, the governance scheme of the Recovery and Resilience Mechanism would be replicated in the fiscal sphere. This would give each government the opportunity to set its own priorities and paths, within its common guidelines for all member states, thus promoting its political appropriation.

In this sense, political involvement in the design and approval of a fiscal path would increase the reputational cost associated with its non-compliance or modification, providing more stability to medium-term paths. "A binding path proposed at the beginning of the legislature could significantly increase the political cost associated with its modification," they say from AIReF.

In fact, from the AIReF they explain that the countries with healthier positions -such as Denmark or Finland- have super lax fiscal frameworks, but the political and reputational cost in case of non-compliance with the deficit or debt objectives is very high.

Finally, regarding institutional aspects, the need for the new fiscal framework to better reflect the specificities of each country can be strengthened through the work of independent national institutions such as AIReF.

Thus, AIReF proposes that fiscal institutions could assume fiscal supervision in low-risk circumstances, with periodic reports to EU counterparts in the relevant forums. The European Commission would maintain its central role in providing specific fiscal policy guidelines for each country and the euro area as a whole.

In addition, in the event of non-compliance by governments, AIReF proposes that supervision would pass entirely into the hands of the European Commission, which could establish stricter requirements, increasing the cost of non-compliance reputations.

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