Published on Tuesday, October 10, 2023

Europe | New tax rules in the EU

The COVID-19 crisis and the aftermath of the war in Ukraine have left a legacy of ballooning public debt levels and structural fiscal deficits higher than those existing in 2019 in many EU countries. Reducing them to avoid greater evils will be a crucial and ambitious task in the coming years.

Key points

  • Key points:
  • The starting point on which almost all European countries agree is that a return to the criteria of the Stability and Growth Pact (SGP) in force until now without improvements makes little sense. For one thing, because the experience of recent decades has not been entirely favorable.
  • The SGP has been breached on numerous occasions and has led to pro-cyclical behavior, i.e. fiscal policies that were too lax during periods of growth, so that no room for maneuver was built up to cope with recessions, and fiscal deficits ended up being excessive, so that countries were forced to make cuts in times of crisis.
  • The results show that the fiscal adjustment under the Commission's proposal is less demanding than the current system, but in any case ambitious. In the medium term, EU countries would have to make, on average, an equivalent adjustment of 2.5% of GDP over four years and the safeguards would only be operational in a few cases, if the Commission's growth projections up to 2028 are met.
  • In the case of Spain, after the planned reduction of the deficit in 2023 and 2024 to 3.4% of GDP, additional adjustments would be necessary to reduce the primary fiscal deficit (excluding interest on debt) by a further 2.5 GDP points between 2025 and 2028, to reach a positive primary budget balance of close to 2% of GDP.
  • Regardless of what the specific details of the new tax rules turn out to be, the principle of prudence must operate: governments should build up fiscal buffers during expansions, in order to implement expansionary policies during recessions.

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