24th Nov 2017


Deficit ceilings are not political toys

  • Stretching deficit ceilings has implications for fiscal scrutiny and even for democracy within the EU (Photo: Images_of_Money)

On 27 October, EUObserver reported on European Commission president Jean-Claude Juncker’s plan to correct deficit ceilings for member states’ spending on refugees.

In his speech for the European Parliament, Juncker promised to stretch the 3 percent deficit ceiling – as established in the Stability and Growth Pact (SGP) – for countries which make a “huge effort” sheltering immigrants.

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Although this measure might work to stimulate particular expenditures, it also has implications for fiscal scrutiny, enforcement of deficit ceilings and even for democracy within the EU.

Juncker’s envisaged “flexibility in the SGP” gives rise to three problems.

Creative accounting

Juncker's plan will trigger and increase creative accounting regarding public finances. Since the first fiscal rules were established in the Maastricht Treaty, EU member states intensively tried to find ways around the ceilings.

Many examples can be found of this opportunistic behavior. To meet the euro criterion, France decreased its deficit level artificially by 0.5% through a one-time payment from a public enterprise in 1997; Portugal did not disclose €7.4 billion of subsidies in 2002 to avoid an excessive deficit; and euro-area governments report overoptimistic economic growth expectations in their draft budgetary plans to decrease their structural deficits.

Governments use the complexity of public finances, budgetary opaqueness, and their informational advantage to avoid measures, and Juncker’s plan provides the governments with a new place to hide expenditures.

Juncker stated that governments need to prove that they are affected by the costs of the refugee policy in order to receive the leeway. Regarding the calibration of expenditures, member states have a clear advantage over the monitoring Commission.

Who controls how local officials spend “refugee money”?

Democratic deficit

The plan creates a democratic deficit through undermining the regular procedures of EU policy making.

Since Juncker’s plan stimulates particular expenditures through relaxing fiscal ceilings, the ordinary legislative procedure is ignored and the European Parliament (EP) circumvented.

In fact, Juncker’s plan uses the governments’ difficulties to meet deficit ceilings and the present threat of fiscal sanctions to enforce domestic policy making. With that, Juncker chooses the corrective arm of the SGP as a political arena in which just the Commission and the Council of Ministers play a role.

Under the corrective arm, the Commission monitors the deficit levels and proposes austerity measures when it assesses deficits as excessive. Then the Council of Ministers must approve the existence of an excessive deficit and the proposed measures.

Those acts (decisions rather than regulations or directives) are not only relieved from parliamentary involvement, they are also exempt from the EU transparency rules keeping the public uninformed.

The fiscal exemptions under Juncker’s plan are thus a private party between the Commission and ECOFIN in which policy is made through playing with stringency.

What’s next?

One cannot foresee how this political role of fiscal ceilings will develop in the future. Other commissioners will try to use this tool to enforce domestic policies in their fields as well.

Implementing Juncker´s plan a first time sets a precedent for other applications, while application and repetition of the plan has clear negative consequences. Using the exemptions frequently induces countries to anticipate the fiscal exemptions in their budgeting which increases the deficit bias. Moreover, not every policy is suitable for the idea.

At this moment, Juncker's idea entails the refugee crisis which requires additional and ad-hoc expenditures. But what if the idea is applied or rather continues expenditures as infrastructural or educational investments.

Every year governments make decisions regarding these expenditures and speculating on trailing exemptions is undesirable but triggered through repetition.

Juncker’s plan might be an effective tool to mobilise funds and push them in a certain direction, but it unfortunately has some fiscal and democratic side effects.

It is a good idea for crisis management but undesirable in the long run. Deficit ceilings are not political toys designed to be stretched.

Sebastiaan Wijsman is a researcher in Political Economy at the University of Leuven

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