Still Large Discretion for Debt Financing of Almost All Types of Government Expenditure

The European Commission has unveiled its revised proposals for reforming the EU’s economic governance rules. While the plan maintains its original aim of negotiating individual trajectories to reduce public debt with Member States, it now includes somewhat more binding requirements. Specifically, Member States whose public debt exceeds 60 per cent of GDP must reduce their debt level by at least 0.5 percentage points annually.

Professor Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim, has offered his evaluation of the proposal: “Germany’s critique of the non-binding nature of the Commission’s initial proposals has had a discernible impact, as countries must now commit to a minimum reduction of the debt level from the start, even with long deadlines.

Nevertheless, these cosmetic adjustments fail to address the basic problem of the Commission’s proposal: the Commission retains too much political discretion in deciding how much debt to allow. The list of expenditures that could permit higher debt is extensive, from digitalisation to climate and defence policy, as well as social challenges and demographics, creating the potential for widespread debt financing of almost all types of government expenditure.
 
Furthermore, the proposed maximum period of seven years, during which a country can be exempted from stringent requirements, is still far too long. This undermines the fiscal responsibility of any incumbent government, as seven years is longer than a typical legislative term, effectively shifting the burden of fiscal adjustment to its successor.”