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ICAEW response to EU fiscal consultation

Author: ICAEW Insights

Published: 07 Jan 2022

An overhaul of the EU’s fiscal framework is underway as the European Union looks to adapt its economic governance rules to post-pandemic life, in what is likely to lead to some of this year’s most significant and politically-charged debates.

The European Union’s (EU) economic governance review was published by the European Commission on 19 October 2021 after recognising the need for a modernised framework that could fully support member states to repair the economic and social impact of the COVID-19 pandemic and respond to the EU's most pressing challenges.

Paolo Gentiloni, European Commissioner for Economy, said the review had been launched against a backdrop of enormous investment needs due to the growing climate emergency and fiscal support provided during the pandemic leading to higher debt levels. “These challenges make it all the more essential to have a transparent and effective fiscal framework. After last year's unprecedented shock, Europe's economy is recovering strongly. Now we need to ensure that our future growth is both sustained and sustainable.”

ICAEW has welcomed the review as an opportunity to support member states in strengthening their public finances and to ensure the resilience and sustainability of fiscal strategies. However, in its response to the Commission’s consultation, ICAEW warns that far better long-term fiscal planning is required and a longer-term vision needs to be part of the review process.

“A long-term, principles-based public finance strategy needs to look 25 to 50 years ahead – covering at least two generations,” ICAEW’s response says. “This would require governments – and by extension all public bodies – to take a longer-term view, balancing current and future needs so that decisions taken now to support short-term fiscal sustainability do not compromise the ability of future generations to meet their needs.”

That longer-term fiscal view could also help fuel proper debates at both member state and EU level on public debt and tax issues, ICAEW believes, which could in turn help to gain public acceptance of necessary tax increases and reduce the temptation for stealth tax rises that overcomplicate the tax system and distort economic incentives.

Meanwhile, ICAEW is calling for a European framework that encourages proper financial management and financial reporting after warning that the absence of a harmonised European government accounting framework creates important inconsistencies in how countries account and report on transactions. “We continue to emphasise the importance of an accruals-based, balance-sheet approach to public sector financial management to enable complete and comparable government accounting,” ICAEW urges in its submission.

At the same time, the review marks an opportunity to reignite the debate around how countries measure economic success, ICAEW believes. While economic growth measured as real increases in GDP continues to remain at the centre of public policy debates, alternatives to GDP already in existence need to be more firmly embedded in countries’ fiscal frameworks. ICAEW points to the Beyond GDP initiative and the broader UN Sustainable Development Goals as providing more comprehensive indicators of environmental and social progress.

Initially launched in February 2020, the review was suspended by the Commission as the pandemic raged on. The deadline for the consultation was 31 December, with the Commission saying it hopes to report back on the review in May this year.

Alison Ring, ICAEW’s Director of Public Sector and Taxation said: “As the insurer of last resort, governments have a major part to play in minimising the economic damage, as well as in rebuilding the economy. It will be more important than ever for governments to develop long-term fiscal strategies to put their public finances onto a sustainable path. This review is a great opportunity to support member states in strengthening their public finances and to ensure the resilience and sustainability of fiscal strategies.”

Dr Susanna Di Feliciantonio, ICAEW’s Head of European Affairs, added: “This outcome of the review process will shape the EU’s fiscal stance for the next decade. This is the moment to widen out the current framework to enable the EU’s green and digital transition.”

Keep up with public sector developments at ICAEW’s dedicated public sector hub

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