Italian Prime Minister Mario Draghi unveiled an ambitious Italian budget for 2022-2024 last week, with deficits above the limits set by the Stability and Growth Pact, in what appears to be a gamble on a change in the fiscal rules of the EU.
At the start of the pandemic, the European Commission triggered the general safeguard clause of the EU’s Stability and Growth Pact, suspending rules designed to rule public spending in member states. However, the suspension will only last until the end of 2022, and from 2023 the rules are expected to be applied again, unless member states change them.
Draghi presented plans for a budget deficit of 9.4 percent of GDP for 2021, lower than previously forecast, after economic growth forecasts were revised up from 4.5 percent to 6 percent.
This strong growth is also expected to lead to a slight reduction in Italy’s debt-to-GDP ratio, which Draghi says is a sign that economic growth is the most effective way to reduce public debt.
“[It] is the first confirmation that the way out of the problem of high public debts is growth first. […] A lot of us have been saying this for some time, but this is the first quantitative confirmation, ”Draghi said.
The Italian government has targeted a budget deficit of 5.6% of GDP. Next year. In 2023 and 2024, budget deficits of 3.9% and 3.3% respectively are expected.
Economics professor Gustavo Piga called Draghi’s proposals “austere” and lamented the pace of fiscal consolidation – reducing the budget deficit from 9.4% to 3.9% in just two years.
These budget figures are still above the levels set by the EU’s Stability and Growth Pact, which requires budget deficits not to exceed 3% of GDP. Fiscal rules also stipulate that public debt levels must not exceed 60% of GDP, a level exceeded by half of EU member states.
Signaling that he expects a change in EU rules, Draghi called them “unrealistic” at the budget press conference on Wednesday (September 29th).
In early 2020, the Commission reviewed the rules of the Stability and Growth Pact with a view to reforming them, although this process was subsequently suspended during the pandemic.
Review of card rules
Earlier this year, Economy Commissioner Paolo Gentiloni and Commission Vice-President Valdis Dombrovskis announced their intention to resume this process, arguing the need to allow more growth-friendly investments under the EU and make it more countercyclical.
Marco Buti, Gentiloni’s chief of staff, said in a debate on Thursday that the reforms should help distinguish productive investments from less productive investments. This should ensure that fiscal rules do not restrict the long-term growth of the European economy and its transition to a more sustainable model.
Although Buti admitted that there was “no scientific basis” for the current 3% deficit and 60% public debt ceilings, he argued that political capital should be spent to change the situation. implementation and increase the flexibility of the rules, instead of attacking them on principle.
While eight national governments have signed a declaration calling for the return of fiscal rules, governments like Draghi’s have no intention of letting the old rules stifle their economic growth. French Finance Minister Bruno Le Maire also called for new rules earlier this year.
For the Austrian Ministry of Finance, one of the most fervent defenders of fiscal rules, it is important that the SGP be applied again after the crisis. Although he does not wish to comment on Italy’s budget plans, he stresses that the requirements of the rules must be reflected in national budgets.
“Politically, it is often easier to give in to the many wishes for additional spending. Essentially, the art is to weigh which measures are pro-growth and sustainable against which measures endanger debt sustainability, ”Austria’s finance ministry said.
Growth vs. ‘unnecessary spending’
Draghi himself echoed this sentiment, stressing the need to differentiate between growth-promoting spending and other spending at Wednesday’s press conference.
“We will have to pay attention to measures that contribute to equal, sustainable and sustainable growth and those that are unnecessary for that equal and sustainable growth,” he said.
Christopher Glück, director of Europe at Forefront Advisers, a political risk consultancy, said the most likely reform of fiscal rules would be to allow more investment in green transition and economic growth.
“Draghi wants to get Italy out of its debt. He does this by using his personal credibility to persuade Europe to accept a slower path of fiscal consolidation where reforms are backed by public investment, ”Glück said.
“This will fuel the discussion on fiscal rules, including giving member states some leeway to deviate from strict debt reduction requirements as long as they make growth-friendly investments, in particular to support the green transition. “, he added.
The Commission is now coordinating with Member States before proposing reforms to fiscal rules in the first half of 2022. This will also be influenced by the composition of the future German coalition government and the new Dutch government, with the Netherlands being a strong supporter of low deficits, but is now stuck in complicated coalition talks.
[Edited by Zoran Radosavljevic and Benjamin Fox]