EU finance ministers to consider focusing on spending cap to cut morass of budget rules

By Jan Strupczewski

AMSTERDAM (Reuters) – European Union finance ministers agreed on Saturday to discuss whether they can regain some control over a morass of EU budget rules by focusing mainly on an annual spending cap as the best measure of compliance.

Years of changes and additions to EU rules, called the Stability and Growth Pact, have made meeting targets extremely complex, prompting an attempt to simplify them, European Commissioner Vice President Valdis Dombrovskis told a news conference after the meeting of EU finance ministers.

“We did not discuss how to change the Pact, just how to choose the indicators to assess the compliance with the Pact,” Dutch Finance Minister Jeroen Dijsselbloem said.

The Dutch, who currently preside over the EU, proposed that the ministers consider using a single indicator with which to judge budgetary compliance, called the expenditure rule.

It already exists in EU law as one indicator to be used to judge the fiscal performance of an EU country, but has so far been more in the background.

The focus until now was on the development of the structural budget balance, a measure that strips off changes to budget revenue and expenditure stemming from the phase of the business cycle as well as all one-offs.

Because the structural deficit is a complex and volatile indicator, the Dutch instead proposed putting more emphasis on the expenditure rule, which says a government cannot increase annual spending more than its medium-term potential growth rate.

“It is directly in the hands of finance ministers. It gives us more guidance in the process of designing the budget. It says in advance what you have to do, and you have the control in your hands,” Dijsselbloem said.

He said that while the structural deficit, which is the key indicator mentioned in EU economic legislation, was a valuable theoretical concept, it could not be directly controlled by finance ministers.

“There was general agreement that we need an indicator that takes out all the cyclical elements and one-offs but preferably it should be more stable and not change all the time, and we could put more emphasis on indicators that we can actually directly influence as finance ministers,” he said.

Dijsselbloem said EU deputy finance ministers would further work on what measurement to use to better assess compliance and the ministers would return to the discussion in the third quarter of 2016.

The aim of the EU budget rules, created in 1997, is to keep nominal budget deficits below 3 percent of gross domestic product and public debt below 60 percent.

But as the rules were revised in 2005, 2011 and 2013 to take account of economic and political realities and to incorporate intergovernmental treaties, they became more and more complex.

“The sheer number of indicators in the current framework poses a massive challenge for the national implementation of the fiscal framework,” the Dutch presidency said in a paper prepared for the ministers’ meeting.

“It contains targets, upper limits and benchmarks for the nominal balance, structural balance, expenditure growth and debt development,” the paper said.

The structural budget balance is important because EU laws oblige governments to strive towards a budget close to balance or in surplus in structural terms.

But it is complicated because it has to strip out commodity price shocks, housing, stock and other asset price cycles, output composition and absorption effects and one-off factors.

The Organisation for Economic Cooperation and Development pointed out that changes in revenues as a result of oil price changes, or interest payments as a result of debt growth, are neither cyclical nor discretionary and yet they are part of the structural balance.

The ministers were also in favour of shifting the focus of budget plans more to the medium term from a year-by-year assessment.

(Reporting By Jan Strupczewski; Editing by Hugh Lawson)