EU on requirements for budgetary frameworks of the Member States - Main contents

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dossier	COM(2023)242 - Amendment of Directive 2011/85/EU on requirements for budgetary frameworks of the Member States.
source	COM(2023)242
date	26-04-2023

1. CONTEXT OF THE PROPOSAL

The proposed amendments to Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States ¹ (hereafter the Directive) are part of a package that includes also a proposal for a Regulation replacing Regulation (EC) No 1466/97 ² (the preventive arm of the Stability and Growth Pact) and amendments to Regulation (EC) No 1467/97 ³ (the corrective arm of the Stability and Growth Pact). The Directive and the preventive and corrective arms of the Stability and Growth Pact are part of the EU economic governance framework.

Reasons for the proposal

The EU economic governance framework has helped to create conditions for economic stability, sustainable and inclusive economic growth and higher employment. This framework currently consists of the EU fiscal framework (the Stability and Growth Pact and the Directive), the Macroeconomic Imbalances Procedure, the European Semester for economic and employment policy coordination, and the framework for macroeconomic financial assistance programmes.

In 2011, to take into account the lessons of the global financial crisis and the euro area sovereign debt crisis, and as part of the package known as the “Six-pack”, Regulation (EC) No 1466/97 was amended by Regulation (EU) No 1175/2011 ⁴, Regulation (EC) No 1467/97 was amended by Regulation (EU) No 1177/2011 ⁵, and Directive 2011/85/EU was adopted.

They helped to ensure a close surveillance of national budgets while paying greater attention to debt levels. In seeking to remedy the root causes of the crisis, the fiscal framework at EU level was complemented by binding provisions at the national level to foster sound budgetary policies in all Member States. For that purpose, the Directive required Member States, among other things, to have in place national fiscal rules, to have independent monitoring of compliance with fiscal rules at the national level and to introduce multiannual budgetary frameworks. These national provisions entered into force to comply with the Directive.

In 2019, the European Court of Auditors (ECA) published a report on the ‘EU requirements on national budgetary frameworks: need to further strengthen them and to better monitor their application’⁶. In the report, ECA noted weaknesses regarding the efficacy of medium-term budgeting and independent fiscal institutions (IFIs) and recommended the Commission to reinforce requirements on medium-term budgetary frameworks and IFIs in line with international standards.

In 2020, the Commission published a Communication reviewing the suitability of the Directive (hereafter the suitability review)⁷, highlighting progress and room for improvement in the current set-up of national budgetary frameworks. The suitability review pointed to significant improvements in the number and strength of national fiscal rules, a widespread adoption of medium-term fiscal planning, more reliable forecasts and higher fiscal transparency, also encompassing contingent liabilities. However, the review noted also that medium-term planning remained largely subordinate to annual budgeting, it questioned the usefulness of reporting monthly cash-based fiscal data and underlined the high heterogeneity in the interpretation of provisions on forecast evaluation, tax expenditure and extra-budgetary bodies. Also, the use of public accounting was found to be constrained by the lack of a formal common EU framework.

Finally, in its Communication of 9 November 2022 the Commission put forward its orientations for a reform of the EU economic governance framework ⁸ aimed at ensuring debt sustainability and promoting sustainable and inclusive growth in all Member States. The orientations envisaged a stronger national ownership, a simplified framework and a move towards a greater medium-term focus, combined with stronger and more coherent enforcement. They also envisaged improving the set-up and performance of IFIs. These orientations also reflected observations that emerged from the public consultation launched in October 2021, which invited other EU institutions and all key stakeholders to engage on the topic ⁹.

Objectives of the proposal

This proposal presents some amendments to the Directive. In line with the Commission’s orientations of 9 November 2022 for a reform of the EU economic governance framework, the amendments aim at strengthening national ownership and the medium-term orientation of budgetary planning. More specifically, they aim at the following:

- Simplifying existing legislation: provisions on the submission of monthly cash-based fiscal data (Article 3(2))¹⁰ are not useful for strengthening national budgetary frameworks as highlighted in the suitability review. Article 8 on the United Kingdom is not necessary anymore. Provisions in Articles 4 i and 4(5) will not be necessary anymore if these requirements feature in the proposal for a Regulation XXX (preventive arm).

- Clarifying provisions: it is proposed that Article 4(6) now specifically refers to independent bodies as those in charge of ex-post evaluation of forecasts, to eliminate an ambiguity detected in the suitability review. It is also proposed that Articles 14(1), 14 i and 14 i better specify reporting requirements on general government bodies and funds that are not part of the regular national budgets, requirements on tax expenditure and contingent liabilities. These requirements have been interpreted in very diverse ways by the Member States and some of these interpretations did not fully reflect the original rationale of the Directive.

- Strengthening national ownership: it is proposed to add or clarify requirements on IFIs. In some cases, the proposed new provisions already applied to the euro area Member States and also to Denmark, Bulgaria and Romania, as contracting parties to the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (hereby the TSCG)¹¹ (new Article 8). Other proposed provisions aim at adding tasks that would allow IFIs to play a role in the surveillance of the EU fiscal framework at the national level as proposed in the proposal for a Regulation XXX (preventive arm) and also in the proposal for amending Regulation 1467/97 (corrective arm). These include the preparation or endorsement of budgetary forecasts as well as assessing sustainability analyses and the impact of policies. Finally, some proposed provisions ensure the independence and accountability of IFIs to reflect standards identified by international organisations, as recommended in the report of 2019 of ECA.

- Promoting a medium-term orientation: it is proposed that the multiannual budgetary dimension in the forecasts is more systematically specified (Article 4) and so would be the link between the annual budget and medium-term planning (Article 10), which had been found to be weak in the report of of 2019 of ECA and in the suitability review.

- Improving the quality of public finance: a few provisions are proposed to promote the accountability of public budgets and increase the transparency of fiscal risks vis-à-vis climate change. Article 9 i, point d would now require assessing the risks deriving from climate change and the implications of climate policies on public finances. Similarly, Article 14 i would require Member States to publish data to the extent possible on disaster and climate-related contingent liabilities as well as on economic losses incurred from natural disasters and climate-related shocks. For these shocks, the fiscal costs borne by the public sector and the instruments used to mitigate or cover the shocks would also be reported.

• Consistency with existing provisions in the policy area

The proposal is part of a broader package of proposals following the Commission’s orientations of 9 November 2022 for a reform of the EU economic governance framework. This package includes also a proposal for a Regulation replacing the preventive arm of the Stability and Growth Pact (SGP) and amendments to the corrective arm of the SGP and aims at establishing a reformed framework that relies on medium-term orientation and national ownership aiming at a credible and substantial reduction of high debt levels and at promoting sustainable and inclusive growth. The reformed economic governance framework, thus, retains the fundamental objectives of budgetary discipline and growth promotion of the SGP and its founding provisions in the Treaty on the Functioning of the European Union (TFEU).

At the same time, by aiming at sound and sustainable public finances as well as the promotion of sustainable and inclusive growth, the reformed framework also meets the main objectives of the Fiscal Compact which forms Title III of the TSCG ¹². In addition, other elements of the proposed legislation retain the substance of the Fiscal Compact. With a medium-term orientation anchored on country-specific debt challenges, the proposal for a Regulation replacing the preventive arm of the SGP reflects in part the Fiscal Compact’s requirement of convergence to medium-term positions and that the time frame of this convergence is to be proposed taking into account country-specific sustainability risks (Article 3(1), point b, of the TSCG). While emphasising the structural balance, the Fiscal Compact also requires an analysis of expenditure net of discretionary revenue measures for the overall assessment of compliance (Article 3(1), point b, of the TSCG), and this analysis is upheld in the proposal for a Regulation replacing the preventive arm of the SGP. The Fiscal Compact allows for temporary deviations from the medium-term objective or adjustment path towards it only in exceptional circumstances (Article 3(1), point c, of the TSCG), as envisaged in the proposal for a Regulation replacing the preventive arm of the SGP. The Fiscal Compact stipulates that in case of significant observed deviations from the medium-term objective or the adjustment path towards it, measures have to be implemented to correct the deviations over a defined period of time (Article 3(1), point e, of the TSCG). In the same vein, the reformed framework requires corrections of deviations from the net expenditure path set by the Council. Moreover, when deviations result in a deficit in excess of 3% of GDP, the Member State could be placed under the excessive deficit procedure (EDP). For a Member State with debt above 60% of GDP, the debt-based EDP would be strengthened: it would focus on departures from the net expenditure path, replacing the current debt reduction benchmark (the so-called “1/20th rule”), which imposed a too demanding fiscal effort for some Member States. The Fiscal Compact assigns a monitoring role of the compliances with its rules to IFIs, and the provisions on the role and independence of those monitoring institutions, which had to be detailed in common principles proposed by the Commission ¹³ in accordance with Article 3 i of the TSCG, are now fully integrated in the proposal amending the Directive. The Fiscal Compact provides that the Commission and the Council play a role in the enforcement process (Article 5 of the TSCG), as stated in the proposed amendments to the corrective arm of the SGP.

Commonalities between the Fiscal Compact and the reformed economic governance framework also stem from the implementation of the Fiscal Compact into the national legal orders. Most Contracting Parties have transposed the TSCG provisions into national laws inserting a direct link with corresponding EU laws ¹⁴. This applies to the medium-term objective and convergence path as well as the assessment of a significant deviation or provisions requiring to follow the recommendations adopted by the Council (all drawn from Regulation No 1466/97).

Considering these commonalities, the proposed reformed economic governance framework can be considered as incorporating the substance of the fiscal provisions of the TSCG into the legal framework of the EU, as per Article 16 of the TSCG.

• Consistency with other Union policies

By inserting requirements on the implications of climate-change on national budgetary policies and fiscal risks, the proposal ensures consistency with other Union policies that support actions for climate change mitigation and adaptation in line with the objective of ensuring a fair transition towards climate neutrality. For some Member States, as part of their Recovery and Resilience Plans, several reforms are being implemented that will conduce to improving the budgetary frameworks, for instance through improving the independence of some fiscal institutions, in line with the proposed amendments.

1.

1. RESULTS OF CONSULTATIONS

WITH INTERESTED PARTIES

As part of the economic governance review, the Commission conducted manifold outreach activities inter alia by organising conferences and engaging in more targeted stakeholder exchange. Most prominently, in October 2021 the Commission launched a public consultation ¹⁵ inviting other EU institutions and all key stakeholders to engage. Through various fora, including dedicated meetings, workshops and an online survey, citizens and a wide range of participants, including national governments, parliaments, social partners, academia and other EU institutions, expressed their views on how to reform the EU economic governance. Many stakeholders favoured a strengthening of national budgetary frameworks, including through a greater involvement of IFIs in the surveillance of the EU framework. In some cases, the IFIs’ involvement was seen as a way to increase the reputational costs of breaking budgetary commitments.

Besides a role in EU surveillance, some stakeholders also advocated for a stronger monitoring role of national fiscal rules for IFIs, to be enforced through an obligation for governments to systematically take into account IFIs’ assessments, along with a more structured dialogue between IFIs and EU institutions. An expansion of tasks was in some cases proposed covering the production of inputs for debt sustainability analyses, the production of macroeconomic forecasts (including those for medium-term plans) that could serve as a starting point for national governments to plan their fiscal policy, and the production or validation of budgetary plans. An advisory role on fiscal policy was also suggested, together with a more prominent role in the public debate.

2. LEGAL ELEMENTS OF THE PROPOSAL

• Legal basis

The legal basis for the amended Directive is the third subparagraph of Article 126(14) TFEU. Strengthening requirements for national budgetary frameworks in the Member States aims to complement and reinforce the Union policy framework to avoid excessive deficits as established under Article 126 TFEU. The proposal applies to all Member States.

• Subsidiarity and proportionality

The proposal is in conformity with the subsidiarity and proportionality principles set out in Article 5 of the Treaty on the European Union. Its objective, namely uniform compliance with budgetary discipline as required by the TFEU, cannot be sufficiently achieved by the Member States and can be better achieved at Union level. In addition, given that the proposed amendments mainly aim at addressing some shortcomings of the Directive or at clarifying its provisions, or at updating them, taking into account in particular the proposal for a Regulation replacing the preventive arm of the SGP and the amendments to the corrective arm of the SGP, they can be best achieved at EU level rather than by different national initiatives.

The proposed amended Directive does not go beyond what is necessary in order to achieve that objective. With a view to reduce the administrative burden for the Member States, some amendments propose simplification of the requirements of the Directive, and coherence with the proposal for a Regulation replacing the preventive arm of the SGP and the amendments to the corrective arm of the SGP is ensured. Proportionality is also ensured by those amendments aiming at clarifying concepts and definitions which ease the implementation of the Directive. Similarly, many IFI-related provisions are drawn from existing rules applying to some but not all Member States, i.e. the TSCG or Regulation No 473/2013. As a result, in many Member States, these provisions are already implemented. In addition, reporting climate-related risks and losses is required taking into account ongoing national efforts and the need to adapt these practices to country specific needs and preferences. Finally, by allowing Member States to transpose these provisions in their national legal order, the proposed amended Directive is also a suitable tool to achieve its objective, as it enables Member States to adapt the requirements to their own specificities.

4. BUDGETARY IMPLICATIONS

The proposal does not have implications for the Union budget.