Experts and officials note improvement in EU fiscal rules

The common position that the new EU fiscal rules are in the right direction and allow “national ownership” of the fiscal trajectory of each member state, was expressed in an event organised by the Chairperson of the House Committee on Financial and Budgetary Affairs and the Fiscal Council.

The 15 February event at the EU House in Nicosia, was attended, among others, by House President, Annita Demetriou, and Minister of Finance, Makis Keravnos.

The European Council, the European Commission and the European Parliament (trilogue) reached an agreement in principle on the fourth review of the EU's fiscal rules (Stability and Growth Pact) last Saturday morning.

The essential difference of the new fiscal rules is that the analysis will be based on the Debt Sustainability Analysis (DSA) of each country, on the basis of which multi-year expenditure paths will be determined by the Commission.

In his address, the Finance Minister said that the use of the nominal net expenditure index “reduces the complexity in relation to the previous governance framework and enhances transparency”, pointing out that, in relation to the previous framework, the objective of the structural balance, the calculation of which has been assessed as “complex and controversial, since it was based on the calculation of a country's potential growth rate”, is being abolished.

“In the medium term, given that Cyprus is above the debt limit, this should be reduced in a gradual manner, which is expected to be achieved based on our forecasts,” he said.

He explained that for countries with a debt-to-GDP ratio over 90% the target will be set for a reduction of 1% each year, while for countries with a debt ratio below 90% the reduction is set at 0.5% per year, noting that Cyprus was below the 90% limit.

“Therefore, it is easier for us, and, in any case, the goal and the planning is to greatly reduce it so that in 2026 we will be at 60%”, he added.

Concluding, Keravnos stated that the government generally considers that the changes to the financial framework of economic governance were in the right direction and that it helps the EU member states implement prudent fiscal and structural policies, in a highly changing and challenging international economic environment.

“The new rules aim, among other things, at simplifying, making transparent and strengthening national ownership of the fiscal framework and improving member states' compliance with its requirements for a realistic downward trajectory of public debt and fiscal deficit reduction”, Demetriou said in her addres.

In relation to Cyprus, Demetriou expressed the expectation that the new fiscal rules would contribute to the smooth continuation of the sustainable and inclusive trajectory of economic development, financial stability and fiscal discipline, while underlining that the deepening of the social dimension of the new rules were essential for ensuring a more hopeful future for the next generations, so that progress in economic indicators primarily reflects the progress and well-being of citizens.

In her speech, the Chair f the House Finance Committee, Christiana Erotokritou, among other things, noted the “national ownership” of the fiscal trajectory which as she said, would allow the country to set its policy priorities more clearly, while as Parliament, they welcome the increased transparency that the new framework brings.

Despite Cyprus’ good performance, she said, “we cannot ignore the fact that the new framework will bring about some changes in the way we operate, both the executive and legislative powers”. For example, supplementary budgets should now be submitted under much stricter conditions, she concluded.

The Chairman of the Fiscal Council, Michalis Persianis, said that despite weaknesses in some aspects, the new rules have positive elements as they weaken “unobserved parameters” such as output gap, while the DSA is considered better for dynamic debt stability. He said that, with the new framework, the momentum for (real) reforms with an emphasis on European goals is strengthened, as well as the social dimension of the budget. The use of supplementary budgets will be made more difficult, he noted.

Giacomo Loi, Researcher of the European Parliament and Lucía Rodriguez Muñoz, Head of Fiscal Rules at the Spanish Fiscal Council and Head of the European Fiscal Councils Group during the discussion of the new fiscal rules, spoke at the event via video conference.

(Source: CNA)