EFM March 2021

Twelve months after the start of the first Covid-19 lockdowns, European economies remain severely affected. This EFM gives an overview of the activities of 32 IFIs, and fiscal measures adopted in 26 EU member states and the UK. The monitor is based on a survey among EU IFIs conducted in January and February 2021, and is largely based on information in autumn 2020 government budgets.

Review of fiscal and budgetary actions in 2020

• The Covid-19 crisis has had an adverse effect on European economies. Based on the most recent forecast from autumn 2020, Independent Fiscal Institutions (IFIs) anticipated real GDP to have dropped by about 6% on average in 2020.
• Due to a wide range of adopted fiscal measures and automatic stabilisers, general government deficits were expected to reach an average of 8% of GDP in 2020.
• National governments adopted major budgetary and fiscal actions in 2020. According to national IFIs, concerns remain about the degree of government transparency, compliance with national fiscal frameworks and the need to foresee the consolidation path.

Outlook for public finances in 2021

• European economies are expected to make a partial recovery from the Covid-19 crisis in 2021. According to autumn 2020 forecasts, they are projected to grow by an average of around 4% in 2021.
• Covid-19 related fiscal measures and automatic stabilisers are expected to continue to have a significant impact on government deficits in 2021. General government deficits are expected to reach an average of 6% of GDP in 2021.
• Some national IFIs with competences on fiscal stance raised concerns about 2021 budgets, notably regarding over-optimistic underlying macroeconomic forecasts, the absence of medium-term forecasts and continued large-scale public spending.

Impact of Covid-19 fiscal response to public deficits

• The 27 countries covered in this report introduced over 1,000 budgetary measures to counter the effects of the pandemic in 2020 and/or 2021. The size of the fiscal measures amounted to 5% of GDP in 2020 and 2% of GDP in 2021. The fiscal stimulus will further increase in 2021, when new measures are adopted or current support measures are extended.
• In general, national IFIs deem the fiscal response to Covid-19 to be appropriate. Nevertheless, there are several concerns over the limited transparency on quantifications and classification of the adopted measures, the absence of viability requirements in measures targeting non-financial corporations, and other issues.

Impact on IFI activities

• The Covid-19 crisis continues to have a large impact on the activities of national IFIs. The main challenges national that IFIs face in executing their tasks include: i) large uncertainty about the pandemic and political decisions, ii) lack of government transparency, iii) lack of clarity on fiscal measures and escape clauses, and iv) insufficient resources.

The results of the Survey of Network's Members on fiscal measures adopted in response to Covid-19 are available here.