Structural deficit: Brussels is willing to review its rulings

  • ECO News
  • 11 November 2016

The European Commission is willing to improve the methodology of structural indicators, namely of the ones ministers depend on to know whether or not to implement more austerity in theirs countries.

The European Commission is willing to review their rules for calculating structural deficit, ECO is aware. The debate has been taking place in Brussels ever since eight countries openly questioned the methodology, in March, and it was now revived by the minister of Finance of some countries, in the context of the presentation of the draft state budgets for 2017. Mário Centeno, Portuguese minister of Finance, was one of them.

Experts in public accounts from the European Commission and the 28 member states have been wondering, for months, what is the best way to estimate potential GDP. On this indicator depends the clearance of the structural balance (for Portugal, a deficit) and the effort the country is considered to be making to balance the accounts. If that indicator says there is little effort, either taxpayers pay more taxes or there are cuts in public expenses.

From what ECO is aware, the EC is willing to improve the estimation of these indicators, as a result of the complaints formally filed from countries due to the methodology still taking place. The pressure to review these rulings has increased after it was disclosed the agreement between France and Brussels to “blemish” fiscal EU standards.

The dramatic situation of Portugal and seven others. Or is it ten?

Portugal is one of the countries unhappy with these rulings: in March – together with Italy, Spain, Latvia, Lithuania, Luxembourg, Slovenia and Slovakia –, signed a letter questioning the reasonableness of the operating rules. The eight countries acknowledged the discussion should take place openly and in-depth, but requested, from the beginning, a slight change in the calculation method: that the forecasts are based on a four-year time frame, corresponding to the time frame of the Stability Programme, instead of two-years.

It was that same issue – the time-frame for estimating potential GDP – that once again antagonized the Portuguese minister of Finance, Mário Centeno, from the European Commission, when discussing the budget draft for 2017. After the letter sent to, and answered by, Mário Centeno from Pierre Moscovici and Valdis Dombroviskis requesting further information, concerns are being analyzed. It is expected the Commission issues a formal opinion on November 16, although Pierre Moscovici, Commissioner for Economic and Monetary Affairs, already brought forward the Portuguese 2017 State Budget “complies” with the rules, adding all that needs to be assessed is whether Portugal is “at risk of default” or just “partially compliant”.

But other countries seem to be joining Portugal and the seven other countries in this fight against the methodology of structural indicators. In Cyprus and Finland’s answers to the clarification requests sent by the EC concerning their budgetary drafts, both governments also call into question the calculation methods used for the structural indicators the EC has been using.

“It would indeed be very odd if Cyprus, a fiscal top-performer during the last few years, were to be penalized for its apparent fiscal over-performance, based on a skewed calculation of the output gap”, is what can be read in the letter sent by Cyprus minister of Finance, Harris Georgiades.

As for Finland, they request that short-term costs for structural and investment reforms are not accounted for in terms of compliance with fiscal goals, explaining these measures increase the potential economic growth, in spite of possibly penalizing the immediate balance.

These issues raised by the eight countries against the rulings made in March took place because of the mandate given to the Commission, in April, to have a thorough debate with experts from the national authorities. The goal was to find ways to improve the rulings.

When confronted by ECO, an official source from the European Commission has confirmed that, “due to the mandate given by the ministers of Finance in the informal European Union’s Council of Economic and Finance ministers (Ecofin) meeting, in April, the technical experts from the 28 member states and the Commission continue to explore every possible ways to improve the estimations of the potential GDP for all member states”. The same source disclosed “the work is in progress”, but stressed the rulings currently being applied “were accepted commonly by all member states, to assure nothing less than equal treatment for every country”.