Public finances in EMU – 2006

One year ago, the EU Heads of State or Government endorsed the March 2005 ECOFIN Council report containing the main directions for reforming the Stability and Growth Pact. This year, the Public Finances in EMU report takes stock of the experience on the revised Pact.

The experience with the implementation of the excessive deficit procedure is judged positive, especially regarding the Excessive Deficit Procedure. The budgetary adjustment in countries with excessive deficits has resumed, while the implementation of the EDP procedures was smooth and consistent with the rules, benefiting from realistic deadlines for correcting deficits and budgetary adjustment requirements defined in structural terms.

The judgement on preventive arm of the SGP is more mixed. The medium term budgetary objectives indicated by Members States in their Stability and Convergence programmes are in line with the agreed principles. However, the budgetary plans indicated by Member States in the Stability and Convergence Programmes do not always have the degree of ambition necessary to rapidly fill the gap between current budgetary situations and medium term objectives.

The report includes two analytical parts focusing on key topics in the current debate.

National numerical rules and institutions for sound public finances. The 2005 March European Council conclusions on the SGP reforms indicate that "…national institutions could play a more prominent role in budgetary surveillance". This year's Public Finances in EMU report analyses which rules are in place in EU Member States that can permit a better control on government budgets, and describes their characteristics on the basis of a survey compiled by fiscal experts in national governments. The analysis in the report shows that there is evidence that rules at national level were effective in promoting sound budgetary policies. A similar analysis is conducted on national institutions that provide technical inputs in fiscal policy making or that provide normative advice on fiscal policy. The replies to the questionnaires indicate that these institutions often play a relevant role in the national policy debate.

Fiscal policy in good times. In spite of the consensus against pro-cyclical fiscal policies, the fiscal stance observed in EU countries is often pro-cyclical. In particular, it was on average pro-cyclical in "good times" at the crossroad of the decade, when a budgetary relaxation was carried out in a period with economic activity above potential. The lack of consolidation in good times was at the origin of the need to correct deficits afterwards, in periods of slow growth. The report analyses the possible causes underlying the pro-cyclical bias in fiscal policy. It is found that expenditures tend to grow faster than GDP especially in good times. A possible solution is a strengthened role of national-level rules to cap the growth of expenditures.

• Primary Source

European Commission: Communication: Public Finances in EMU 2006 – The first year of the revised Stability and Growth Pact http://ec.europa.eu/economy_finance/publications/european_economy/2006/comm2006_en.pdf

---