New EU fiscal rules: expenditure path to be single indicator for whole adjustment period

eurozona banderas CM

Bankinter: Ecofin reaches a political agreement on the reform of fiscal rules. Once revised, it will have to go through Parliament and the Council; it is expected to come into force in 2024. Each country will present its own fiscal plan with a fiscal adjustment period of four years, extendable to seven years, to allow for strategic investments and reforms. The single indicator for the whole adjustment period will be the expenditure path and cumulative deviations are collected in a “control account”.

Safeguards: (1) Countries with debt of between 60% and 90% will have to reduce debt by -0.5% of GDP; those with more than 90% an effective average annual reduction of 1%; (2) the fiscal space: countries in the preventive arm (not under EDP) will continue to reduce their deficit to a structural deficit of 1.5%; (3) these countries (preventive arm) will be 0.4% of GDP per year, which can be reduced to 0.25% in case of extension from four to seven years. (4) A transitional regime is envisaged until 2027 that softens the interest burden.

Bankinter’s analysis team’s opinion:
The new rules, although pending review and approval processes, establish an individualised and medium-term plan (between four and seven years) to adjust the deficit and debt and add flexibility (the transitional regime on debt interest and the special treatment of investments in the NGEU plans), after four years of suspension of the rules. The government’s macroeconomic scenario projects a deficit of -3.9% in 2023 and -3.0% by 2024. Bankinter estimates reflected in Strategy 2024 point to -4.1% 2023; -3.3% 2024 and -3% in 2025 and a debt/GDP of 107.7%, 107.5% and 106.7% respectively.

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