DG ECFIN Slide 1 Improving fiscal policy in the EU: ways forward Klaus Regling FBP - CPB seminar on ‘Economic and fiscal forecasts and the budgetary process within the framework of the Stability and Growth Pact’ Brussels 1 February 2006

DG ECFIN Slide 2 1.Why is an improvement of fiscal policy in the EU needed? 2.Contribution of the 2005 SGP reform 3.Ways forward for ensuring the conduct of sound fiscal policies in the EU Improving fiscal policy in the EU

DG ECFIN Slide 3 A large increase in debt levels Source: Commission services.

DG ECFIN Slide 4 Government finances currently on a non sustainable path Source: Commission services. Debt developments for EU-25 up to 2050 based on the 2004 SCPs

DG ECFIN Slide 5 Lack of fiscal consolidation in good times Source: Commission services.

DG ECFIN Slide 6 1.Remove the deficit bias and promote policies that ensure the sustainability of government finances 2.Avoid the conduct of pro-cyclical policies 3.Improve the quality of government expenditure Overarching objectives of fiscal policy in the EU

DG ECFIN Slide 7 More economic rationale and room for judgement Increased focus on fiscal efforts rather than only on nominal results New incentives for fiscal consolidation in good times More emphasis on debt and sustainability The SGP reform – salient features

DG ECFIN Slide 8 A rules-based framework relying on economic rationale and judgement is expected to lead to better outcomes : –Increased ownership of the framework in the Member States –Increased reputational costs of resisting the rules of the Pact –Straightforward provisions prevent abuses of the room for judgement and safeguard the core function of the Pact => First experiences with the revised Pact are encouraging The SGP reform - assessment

DG ECFIN Slide 9 Ways forward Challenges for ensuring the conduct of sound fiscal policies in the EU: Continue progress in the analysis of government finances Promote institutional settings at national level that encourage governments to pursue sound policies Improve consistency and interactions between the national framework for budgetary policies and the EU framework

DG ECFIN Slide 10 Implementing adequate institutional settings at national level Adressing the deficit bias at its roots: Directly, by imposing constraints on the conduct of fiscal policy (unbiased inputs, strong fiscal rules, delegation of part of fiscal policy) Indirectly, by increasing reputational costs for the conduct of unsound policies (independent analysis in the area of fiscal policy)

DG ECFIN Slide 11 Member States with strong medium-term expenditure rules show a better adherence to multi-annual plans Source: Commission services.

DG ECFIN Slide 12 Implementing adequate institutional settings at national level Adressing the deficit bias at its roots: Directly, by imposing constraints on the conduct of fiscal policy (unbiased inputs, strong fiscal rules, delegation of part of fiscal policy) Indirectly, by increasing reputational costs for the conduct of unsound policies (independent analysis in the area of fiscal policy)

DG ECFIN Slide 13 Conclusions 1. Revised SGP rules are a good basis for better fiscal policies 2. Implementation will be key – judgement should be used to increase the economic rationale of decisions and recommendations 3. Need to strengthen efforts to adress the deficit bias at its roots