The European Commission takes over manual fiscal management of countries that have exceeded deficit or debt limits

Already in the distant year 2020, the European Commission launched a discussion of changes in fiscal management rules. The reason – significant dissatisfaction on the part of some member states regarding the uniform treatment and the lack of flexibility of the fiscal rules. The end of this process is now in sight, after a few weeks ago the Commission published the proposals for new texts in the EU's main regulatory documents, which regulate the rules on fiscal management and surveillance, the Stability and Growth Pact, on macroeconomic imbalances and the budgetary framework. This is perhaps the biggest reform in the area of fiscal management and monitoring in the union since the global crisis of 2008-2009.

What do the changes entail?

The reform aims to unify the multi-year budget planning, the monitoring of macroeconomic imbalances, the excessive deficit procedure and the structural reforms of individual countries currently included in recovery and sustainability plans. At the center of the change are the transformation of national fiscal rules and the introduction of national medium-term fiscal-structural plans. In these plans, member states must include their fiscal goals, measures to address macroeconomic imbalances, priority reforms and investments for a period of four years. The plans will be evaluated by the Commission and accepted by the Council based on common criteria.

The rules for a general government deficit of up to 3% and a gross government debt of up to 60% of GDP are retained, removing the rules for structural balance and for a fixed annual debt reduction of 1/20th. The current expenditure rule to limit the growth of expenditure relative to the growth of potential GDP is being replaced by a basic criterion called the "net expenditure path". It limits the growth of net primary expenditure (total expenditure minus discretionary income measures, cyclical unemployment benefits and interest expenditure) in the country's fiscal plan until the deficit and/or debt criterion is reached. This will also be the main, most important indicator by which the Commission will evaluate the implementation of the fiscal plan.

The fiscal monitoring and management process is expected to proceed as follows [1]:

According to the proposed changes in the new regulation [2], for each country with a debt above 60% or a deficit above 3% on an accrual basis, the Commission will prepare and provide a technical trajectory of the change in net costs (technical trajectory), which covers a minimum adjustment period of 4 years (maximum 7 years under certain circumstances). For countries with deficits and debt below reference levels, the Commission will provide technical information on net expenditure movements. When calculating the technical trajectory of the costs, the Commission steps on the debt sustainability analysis. The trajectory should meet a number of requirements, but ultimately the goal is that at the end of the four-year period, as well as a certain period after its end, the deficit and the debt will gradually and permanently reach and remain below the reference values.

Each country then submits to the Commission its four-year fiscal-structural plan, which will replace the Convergence Programs and the National Reform Programmes. In these plans, countries should demonstrate that the net expenditure path ensures that the deficit remains firmly below the 3% reference value over the medium term, and that debt will gradually decline within reasonable limits, reaching and remaining below the 60% of GDP reference value at unchanged policies in a 10-year period after the end of the plan. The plans must present the macroeconomic assumptions, reforms and investments that the country plans to make and which are consistent with national recovery and resilience plans or other EU strategic documents or policies.

Any country that wants to deviate from the spending trajectory – and especially those that want a longer consolidation period or higher net spending growth – should present to the Commission a solid and demonstrable economic case to justify how the new proposed trajectory of net spending will lead to compliance with the deficit and debt constraints. The Commission's assessment of the countries' plans will include an assessment of the credibility of the macroeconomic assumptions and whether the change in net spending leads to compliance with the deficit and debt rules in the medium term and beyond the end of the plan [3]. Once approved and accepted, the net cost path becomes binding on the parties for the duration of the plan.

What will the proposed changes in fiscal management mean for Bulgaria?

Although at this preliminary stage it is difficult to make an in-depth assessment of the necessary changes in the practice and regulatory framework of fiscal management in Bulgaria, it is very likely that the changes in the regulations [4] will require changes in our main national fiscal law - the Law on Public Finances, especially in its part on fiscal rules, and also amendments to the law on the Fiscal Council and automatic corrective mechanisms.

Changes are also expected in the practice of the Ministry of Finance for budget forecasting and planning, as well as coordination with the European Commission on the preparation of national fiscal plans. At this stage, it is clear that budgeting in Bulgaria is increasingly moving away from EU practices and the requirements for good fiscal management - this is evidenced by the strong concentration on annual planning and the annual budget law, the weak connection between medium-term forecasts and the budget, the neglect of the program budgeting and making it de facto only a supplementary planning mechanism. Even more problematic are the ambiguity of the need for adjustments in certain budget indicators, the strong role of ongoing cost management and, last but not least, the continued adherence to cash planning and budget reporting instead of moving to an accrual basis. It is time to consider a comprehensive budget reform that builds on good practice in fiscal management, enabling a unified and well-thought-out process for planning and implementing the fiscal program, aligned with the Commission's requirements and global best practice – not just to once again translate the texts of the EU Regulations in order to incorporate them pro forma into the law.

Difficulties may also arise in the preparation of the fiscal plan, when consolidation is required combined with the fulfillment of European investment requirements. Such an example for some EU countries is compliance with the requirements of the Green Deal. For them, this means a more significant consolidation of other types of spending, which would provide additional fiscal space for "green" investments. It is possible that we also face a similar problem, and solving it begins with strict compliance with the rule of deficit.

And last but not least, the role of the Fiscal Council should be strengthened. The opinion of the Fiscal Council on medium-term fiscal-structural plans will be provided to the European Commission, which means that the council must have the opportunity and capacity to assess the movement of net spending and the achievement of the deficit and debt targets.