It will now be more difficult for the Commission to place a member state under an excessive deficit procedure if essential investments are ongoing, and all national expenditure on the co-financing of EU funded programmes will be excluded from a government’s expenditure calculation, creating more incentives to invest.

Countries with excessive accumulated debt will be required to reduce it on average by 1% per year if their debt is above 90% of GDP, and by 0.5% per year on average if it is between 60% and 90%. If a country’s annual deficit is above 3% of GDP, it would have to be reduced during periods of growth to 1.5%, building a spending buffer for difficult economic conditions.

The new rules contain various provisions to allow more breathing space. Notably, they give seven years instead of the standard four to achieve the national plan’s objectives. MEPs secured that this additional time can be granted for whatever reason the European Council deems appropriate, rather than only if specific criteria were met, as was initially proposed. 

At the request of MEPs, countries with an excessive deficit or debt may request a discussion with the Commission before it provides guidance on the member state’s expenditure. A member state may request that a revised national plan be submitted if there are objective circumstances preventing its implementation, for example a change in government.

The role of the national independent fiscal institutions -tasked with vetting the suitability of their government’s budgets and fiscal projections- was considerably strengthened by MEPs, the aim being that this greater role will help build national buy-in to the plans.

German co-rapporteur Markus Ferber, from the EPP, said that “this reform constitutes a fresh start and a return to fiscal responsibility. The new framework will be simpler, more predictable and more pragmatic. However, the new rules can only become a success if properly implemented by the Commission”.

Portuguese socialist Margarida Marques said that “these rules provide more room for investment, flexibility for member states to smooth their adjustments, and, for the first time, they ensure a ‘real’ social dimension. Exempting co-financing from the expenditure rule will allow new and innovative policymaking in the EU. We now need a permanent investment tool at the European level to complement these rules”.

The directive was passed by 359 votes to 166, with 61 abstentions. Member states will have to submit their first national plans by 20 September 2024. These will be medium-term plans outlining their expenditure targets and how investments and reforms will be undertaken. Member states with high deficit or debt levels will receive pre-plan guidance on expenditure targets, with numerical benchmarks.

But not all MEPs were convinced by the safeguards for countries with excessive debt or deficit, the new focus on fostering public investment in priority areas and the assurances that the system will be more tailored to each country, rather than applying a one-size-fits-all approach. The Greens/EFA Group argued that budgetary rules should “prioritise people and planet over fiscal hawkishness”. 

Their President, Philippe Lamberts, said that in one of their last votes before the European election in June, MEPs were passing “one of the most important but regrettable reforms of their careers.  

“Unfortunately, at the heart of this reform lies an ideological obsession that prioritises the dogma of debt reduction over investment and social spending. These new budgetary rules will impose a straitjacket on all EU Member States. It will deprive governments of the financial resources needed to guarantee a thriving economy, social services and climate action. This obsession with debt reduction will inevitably lead to a return of austerity, at a time when the EU urgently needs to boost investment.   

“We sorely need a reform of the current fiscal rules, which are out of date, poorly enforced and unfit for purpose. But the reform being voted on today ignores the experiences of the financial crisis and the socio-political scars left on our continent by heavy bouts of austerity. We should promote debt sustainability over debt reduction and turn our resources toward more pressing policy priorities such as the green transition, social spending and the war in Ukraine”.