DG ECFIN Improving fiscal policy in the EU

DG ECFIN Improving fiscal policy in the EU: ways forward Klaus Regling FBP - CPB seminar on ‘Economic and fiscal forecasts and the budgetary process within the framework of the Stability and Growth Pact’ Brussels 1 February 2006 Slide

DG ECFIN Improving fiscal policy in the EU 1. Why is an improvement of fiscal policy in the EU needed? 2. Contribution of the 2005 SGP reform 3. Ways forward for ensuring the conduct of sound fiscal policies in the EU Slide 2

DG ECFIN A large increase in debt levels Source: Commission services. Slide 3

DG ECFIN Government finances currently on a non sustainable path Debt developments for EU-25 up to 2050 based on the 2004 SCPs Source: Commission services. Slide 4

DG ECFIN Lack of fiscal consolidation in good times Source: Commission services. Slide 5

DG ECFIN Overarching objectives of fiscal policy in the EU 1. Remove the deficit bias and promote policies that ensure the sustainability of government finances 2. Avoid the conduct of pro-cyclical policies 3. Improve the quality of government expenditure Slide 6

The SGP reform – salient features DG ECFIN More economic rationale and room for judgement • Increased focus on fiscal efforts rather than only on nominal results • New incentives for fiscal consolidation in good times • More emphasis on debt and sustainability Slide 7

DG ECFIN The SGP reform - assessment A rules-based framework relying on economic rationale and judgement is expected to lead to better outcomes: – Increased ownership of the framework in the Member States – Increased reputational costs of resisting the rules of the Pact – Straightforward provisions prevent abuses of the room for judgement and safeguard the core function of the Pact => First experiences with the revised Pact are encouraging Slide 8

DG ECFIN Ways forward Challenges for ensuring the conduct of sound fiscal policies in the EU: • Continue progress in the analysis of government finances • Promote institutional settings at national level that encourage governments to pursue sound policies • Improve consistency and interactions between the national framework for budgetary policies and the EU framework Slide 9

DG ECFIN Implementing adequate institutional settings at national level Adressing the deficit bias at its roots: • Directly, by imposing constraints on the conduct of fiscal policy (unbiased inputs, strong fiscal rules, delegation of part of fiscal policy) • Indirectly, by increasing reputational costs for the conduct of unsound policies (independent analysis in the area of fiscal policy) Slide 10

DG ECFIN Member States with strong medium-term expenditure rules show a better adherence to multi-annual plans Source: Commission services. Slide 11

DG ECFIN Implementing adequate institutional settings at national level Adressing the deficit bias at its roots: • Directly, by imposing constraints on the conduct of fiscal policy (unbiased inputs, strong fiscal rules, delegation of part of fiscal policy) • Indirectly, by increasing reputational costs for the conduct of unsound policies (independent analysis in the area of fiscal policy) Slide 12

Conclusions DG ECFIN 1. Revised SGP rules are a good basis for better fiscal policies 2. Implementation will be key – judgement should be used to increase the economic rationale of decisions and recommendations 3. Need to strengthen efforts to adress the deficit bias at its roots Slide 13