All the new errors of the EU Commission on public spending
What is wrong with the Commission's proposal on regulating the tax policy of the member states. The comment of the economist Gustavo Piga, taken from his blog
The proposal from the European Commission (EC) on the rules that should govern the fiscal policy behavior of the Member States of the European Union (EU) is now on the European political table: how much to tax, how much to spend, how much to borrow annually. It was conceived with the ambition of acting as a new structure to replace the austere one, called the Fiscal Compact, which has generated so many economic crises, polarizations and social tensions. The expectation was therefore that the new proposal would take into account the failures we have behind us to be inspired by effective and cohesive principles. It wasn't like that. The EC proposal is a pejorative of the previous one, thus making an already fragile continent even weaker. Because?
First, the proposal is technocratic and not political, a harbinger of failure. Proof? The striking similarity between this 2022 EC proposal and the 2018 one contained in the then annual report of the hyper-conservative European Fiscal Board, ideologically close to the Brussels technocrats. Finding such a proactive analogy years later amounts to acknowledging how in fact the EC has been deaf to any different, and especially less austere, vision of fiscal policy in order to avoid the failures of the past. A textual analysis of the proposal clearly reveals above all the spirit that animated the EC: the word most present (96 times) is "debt", compared to only 34 mentions of the word "growth".
Second, there is the issue of asymmetry of treatment between countries in different conditions. The words "surveillance" and "monitoring" are mentioned 70 times, confirming the initial distrust of some member countries considered less virtuous than others.
The word "public expenditure" is indeed mentioned 41 times, but always in the sense, as we will see, of a reduction of this for countries with high GDP-debt, while employment and unemployment, which should be the subject of maximum attention everywhere, are mentioned … 6 times in total. And although it is stated at the outset that the "reform is … anchored to a common framework which guarantees equal treatment", a few pages later one reads how the Member States would be, if the EC proposal were approved, obliged to follow "a framework surveillance … that … differentiates countries more by taking into account their public debt challenges”. Countries more in difficulty in terms of starting situation will therefore be asked to do not less, but more, in terms of austerity: a policy that will increase the divergences between EU countries and within each country, and therefore the risk of economic and social instability.
However, the EC proposal innovates in an even more profound way, widening the gap that divides the countries, rather than uniting them more. It proposes to focus attention on a single key indicator, primary expenditure net of interest expenditure, requiring that each Member State, especially one with the highest debt-to-GDP, introduces a (complicated to calculate) ceiling on public expenditure (including that in the capital account) and you accept a constantly declining dynamic of this, paying little attention to its quality or otherwise. A terribly wrong recipe, as well as ideological, because, while it is aimed at generating a reduction in the debt-GDP ratio, this instead will tend to rise – as it has done in this decade – due to the collapse in GDP that the lower public spending will generate. It would be enough to recall how rigorous studies have shown that Brexit was caused precisely by an austere reduction in those social expenditures (on which the attention of the EC indicator is focused today) to understand the risks to which the new rule would expose the 'EU.
Lastly, but perhaps most seriously, is the fact that, without fear of resulting in a blatant conflict of interest, the EC assigns itself agenda-setting powers, assuming the right to establish upstream a public expenditure adjustment framework of reference for each Member State, from which it will be difficult for the latter to deviate. It is probable that such a power could be contested as to its constitutional legitimacy, especially if we recall what the German Supreme Court of Karlsruhe was able to reiterate only a few years ago: "It is up to the (German) Parliament to determine the total tax burden imposed to citizens and decide on essential expenditure of the State. Therefore a transfer of sovereign powers violates the principle of democracy in those cases in which the type and level of public expenditure are, to a significant extent, determined at the supranational level, depriving Parliament of its decision-making prerogatives". Our government does not wait for the German reaction: it would do well to veto a proposal that would quickly lead to a very serious internal crisis within the EU.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/commissione-europea-spesa-pubblica-errori/ on Sun, 27 Nov 2022 07:12:27 +0000.