2018 annual report of the European Fiscal Board

On 10 October 2018,  the European Fiscal Board (EFB) published its second annual report. The report reviews the way the EU fiscal framework was implemented in 2017, highlighting positive and negative developments and scope for improvement. It welcomes the return to some timid fiscal consolidation in 2017 in the euro area as a whole, based on current estimates. At the same time, the Board regrets that some Member States with large fiscal imbalances missed the opportunity of the solid economic expansion to reduce their high public debt faster and build fiscal buffers. Flexibility should work symmetrically: after the fiscal framework was softened during the recovery, requirements should have been tightened and compliance more strictly ensured in better economic times. Looking ahead, the report proposes a simpler and more effective Stability and Growth Pact (SGP) than the current one.

The EFB’s second annual report provides a comprehensive and independent assessment of how the SGP was applied in the last complete surveillance cycle, 2017. Economic activity was significantly more dynamic than expected and this helped governments reduce budget deficits and public debt as ratios to GDP. Countries representing around 40 % of the European economy achieved a sound fiscal position as defined by their medium-term budgetary objective; this is a positive sign. However, only part of the higher government revenue went into building fiscal buffers. It is problematic that some countries – critically, mostly those with high levels of public debt – spent higher revenue on expenditure slippages. As a result, their fiscal position deteriorated or did not improve by as much as required. In contrast, some countries with fiscal space consolidated further.

The Commission and the Council applied the EU fiscal rules firmly in some non-euro area countries but also showed forbearance in a number of other cases, both in setting fiscal requirements and when assessing compliance with requirements. The Commission also contributed to confusing intentions by calling for a sizeable fiscal expansion in 2017 that would have implied at least some deviation from the SGP requirements. Overall, in the 2017 fiscal surveillance cycle, the Commission acted as if the euro area were still in a fragile and uncertain recovery. The overall thrust in the implementation and interpretation of rules did not adapt to the much more favourable macroeconomic conditions.

In this context, in 2017 some national independent fiscal institutions (IFIs) helped promoting fiscal discipline and improving the quality of official forecasts. Others remained silent, partly because of practical, institutional and political constraints. Important conditions for an effective role of IFIs are that they have free access to all the relevant information, at both national and EU level, and that governments have to comply with or explain deviations from their advice.

To overcome the weaknesses and complexity of the current EU fiscal framework, the Board proposes a radical simplification of the rules and a clarification of governance. The reformed Pact would be based on one single target (sustainable public debt), one single instrument (controlling net expenditure growth) and one general escape clause. The report provides an illustrative example of how it could work and discusses the crucial issue of governance — including how the inevitable discretion and judgement should be exercised.

Background

The European Fiscal Board (EFB) is an independent body mandated to advise the European Commission on the overall direction of fiscal policy of the euro area and to evaluate how the EU fiscal governance framework is implemented. It was formally established end 2015 and began operating shortly after its members were appointed in October 2016.

The annual report that is published today documents the work of the European Fiscal Board (EFB) in 2018. It offers an independent view of fiscal policy surveillance and coordination. The report’s content and structure are based on the main areas of responsibility set out in the Commission Decision (EU) 2015/1937 establishing the EFB. Firstly, it provides an evaluation of the implementation of the EU’s fiscal framework. Secondly, it reviews and assesses the fiscal stance for the euro area as a whole and in individual Member States from an economic perspective. Thirdly, it takes a look at national fiscal councils with a view to identifying aspects of best practice. Finally, the report also puts forward a number of suggestions on the future evolution of the EU's fiscal framework.