Brussels proposes new fiscal rules

On 26 April 2023 the European Commission proposed reforming the fiscal rules of the European Union, with debt-reduction plans tailored to each country instead of uniform targets. It was the start of a discussion that would occupy European governments for much of the year.

Fiscal rules set limits on the deficit and debt that states can accumulate, and therefore condition how much they can spend, how much they can raise and how they organise their economic policy. Although they may seem a distant matter, they influence taxes, public aid and the confidence of markets in the soundness of each country. For anyone planning investments several years ahead, the discussion is relevant because it anticipates the tone of European economic policy and, with it, the room governments will have to support specific sectors or cut taxes.

What the Commission proposed

The proposal changed the logic of the rules: instead of uniform targets for everyone, each country would have a debt-reduction plan tailored to its situation. The idea was to recognise that starting points are very different and that demanding the same of everyone may be unrealistic or ineffective.

It was a proposal, not a rule already approved, and it would have to be negotiated among the states. Such negotiations tend to be long, because the least indebted and the most indebted countries have different interests, and because the balance between flexibility and control is hard to agree. A plan tailored to each country allows, in theory, different paces of debt reduction depending on the starting position, but it also requires closer monitoring of each plan by the European institutions.

The return of fiscal discipline

After years of suspension, fiscal discipline was returning. The European rules on deficit and debt had been put on hold during the crisis, and their return marked the end of a period of extraordinary spending. During that time states had had room to support families and companies without worrying so much about the limits.

Restoring the rules does not necessarily mean immediate austerity, but it does mean a change of tone: public spending would have to be justified more carefully and countries would have to show a credible path for reducing their debt. That path can be achieved with less spending, with more revenue or with a combination of both. Fiscal discipline also influences the interest rates states pay, because investors demand more return from countries whose debt they perceive as less sustainable, and that cost ends up feeding through to the economy. That is why the debate is not merely accounting: it affects each country’s ability to finance itself on reasonable terms and, indirectly, the financing of companies and families.

What it means for Spain

For Spain, with high debt, that anticipated pressure on spending and on taxes in the following years. It is not possible to know in advance what decisions will be taken, but the general framework points to a public administration with less room to offer extraordinary support and a greater need to adjust its accounts.

For companies and families, it is worth treating taxation as a variable that can change, and avoiding decisions that depend on certain benefits or rates lasting for ever. When planning an investment, a succession or a restructuring, it is more prudent to allow a margin against possible changes than to rely on the conditions of the moment. In practice, this suggests reviewing business plans that depend on tax incentives or subsidies with a limited life, and assessing their viability in a scenario without them or with less favourable conditions.

Planning with flexibility is more prudent than treating today’s rules as fixed.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.