Working in the same or different directions? Assessing the relationship between EU and domestic fiscal frameworks
EU countries have a two-tier framework to oversee fiscal policy, with budgetary rules and institutions at both the EU and domestic levels. In April 2023, the European Commission published its proposals for fiscal reform under the economic governance review. They call for strengthening EU and domestic frameworks to promote national ownership.
This study examines discrepancies between EU and national frameworks under the current regime, including between assessments of the European Commission and independent fiscal institutions (IFIs). It draws on evidence from a new survey and country case studies. The key findings are summarised below.
- At the EU level, a fiscal framework is needed to avoid negative spillovers from unsound fiscal policies and to coordinate fiscal policies so as to achieve the appropriate fiscal stance. Domestically, fiscal frameworks seek sound economic management and to ensure long-run sustainability. While these objectives are likely to be similar, they are not identical.
- EU countries are obliged to comply with both frameworks; some choose to mirror EU fiscal rules, but many have separate national frameworks.
- A new survey of national IFIs conducted for this study finds that EU and domestic fiscal frameworks have worked in harmony for most countries, most of the time.
- However, there have been cases of material disagreement between the EU and national levels in the assessments of public finances.
- The main areas of disagreement have been based on discrepancies in the assessments of output gaps and the structural balance, the size of discretionary revenue measures and one-off measures. They have also pertained to invoking and withdrawing the general escape clause of the Stability and Growth Pact as well as assessments of overall compliance with the rules.
- These disagreements have generally seen national frameworks and IFIs taking a more prudent approach than the EU rules or assessments of the Commission.
- National IFIs have reported some cases where their assessment of significant deviation from the fiscal rules was contradicted by an assessment of compliance by the Commission, which undermined their assessments and their credibility.
- The April 2023 legislative proposal for the reform of EU economic governance could reduce the margin of discrepancy and improve the framework’s transparency by focusing on a simpler operational rule. Nevertheless, some potential areas of divergence could remain.