Impact of new economic rules on public services

New economic rules on public services

(16 April 2024) New research provides compelling evidence in support of the call by the ETUC and EPSU for MEPs to reject the new fiscal rules that are set to be voted in the European Parliament on 24 April.

The report, Navigating constraints for progress, by the New Economics Foundation (NEF) analyses both investment needs and the impact of the new fiscal rules on public finances and shows that 18 countries will not be able to bridge the gap in social investment and only five would be able to meet both social and green investment needs.

The NEF, has produced a report, commissioned by the ETUC that argues that the new fiscal rules will seriously limit Europe’s capacity to achieve its social and environmental goals. It adds that they will make Europe poorer, and harm the EU’s social fabric, productive capacity, and ability to invest towards a stronger and more resilient economy. The report lays out alternative policy solutions, including renegotiation of the fiscal rules, progressive taxation, and establishing a long-term investment fund.

The NEF report underlines the importance of ensuring adequate funding and investment in key areas of public services:

“Investing in education, healthcare, long-term care, and childcare yields numerous benefits for society at large, extending far beyond the immediate recipients of these services. These investments lay the groundwork for a healthier, more productive, and more equitable society, ultimately contributing to overall economic growth and stability.”

It also raises concerns about the impact of public spending restraint and challenges the longstanding myth that fiscal consolidation can deliver growth. It cites the International Monetary Fund which has become more sceptical about any potential positive impact of fiscal consolidation on reducing the debt/GDP ratio.  The Fund’s World Economic Outlook of April 2023 said that: “A broad range of econometric methods, based on well-established methods in the empirical literature, confirm that fiscal consolidations do not reduce debt ratios, on average.”

Using figures from the European Commission, the NEF report shows that investment in Europe’s social infrastructure is already €192 billion a year less than required to meet the needs of citizens – €120bn in health, €57bn in affordable housing and €15bn in education.  The NEF then analyses the public finance situation across the EU, and finds that the fiscal rules would mean 18 member states including Germany, France, Italy, Spain and Poland could not make the investments needed to bridge that gap (table 1).
 
Furthermore, when green investment needs are taken into account, the NEF calculates that just three member states would be left with the fiscal capacity to meet the EU’s own investment targets (table 2).

The report notes that the EU’s Recovery and Resilience Fund (RRF) is important in helping countries boost their social and green investment but it says that even if the scheme was extended, only five countries would be able to meet their social and green investment targets. 

The research further shows that an investment mechanism would need to be over three times larger than the RRF to stand a chance of mitigating for the damage of the new fiscal rules.

ETUC General Secretary Esther Lynch said: “Europe needs economic rules that put the needs of working people and the future of the planet first. The EU’s own polling consistently shows these are the priorities of European citizens and acting in complete contradiction to them just months from the elections is a recipe for disaster.  
  
“This report makes the consequences clear: adopting the proposed fiscal rules would mean fewer hospitals, schools and affordable homes at a time when pressure is rising on all three. ”

EPSU General Secretary, Jan Willem Goudriaan, said: “The impact of the last major round of austerity is still felt in some countries over 10 years on. We remember clearly the deep cuts in public services and attacks on public service workers. It would be a massive mistake to revisit those policies when our public services are crying out for investment and measures to address staffing shortages.”

 

Table 1: The 18 member states who can’t meet EU’s social investment targets 
 

 

Low estimate of spending needed for social investment

Maximum spending increase under fiscal rules, 2027

Country

% of GDP

 Euro in 2021 prices

% of GDP

Euro in 2021 prices

Greece

0,5%

920 million

0,5%

900 million

Cyprus

0,4%

110 million

0,2%

50million

Bulgaria

0,4%

250 million

0,0%

0

Portugal

0,6%

1.3 billion

0,0%

0

Germany

0,5%

19.3 billion

-0,1%

-3.6 billion

Spain

0,6%

7.7 billion

-0,1%

-1.2 billion

Austria

0,5%

2 billion

-0,1%

-410 million

Latvia

0,3%

100 million

-0,2%

-70 million

France

0,4%

11.2 billion

-0,2%

-5 billion

Italy

0,4%

8.1 billion

-0,2%

-3.6 billion

Slovenia

0,4%

180 million

-0,3%

-157 million

Poland

0,5%

2.7 billion

-0,4%

-2.3 billion

Finland

0,4%

1 billion

-0,4%

-1 billion

Malta

0,3%

40 million

-0,5%

-80 million

Belgium

0,5%

2.5 billion

-0,5%

-2.5 billion

Romania

0,4%

1 billion

-0,5%

-1.2 billion

Hungary

0,4%

570 million

-0,6%

-920 million

Slovakia

0,6%

570 million

-0,8%

-800 million

 

Table 2: How much extra fiscal capacity each country would need to be allowed to meet green and social investments in 2027

 

Investment gap to be filled for green and social investment needs if country spends the maximum amount the EU fiscal rules allow, 2027

 

 

% of GDP

GDP (€mns, 2021 Prices)

 

 

Lower estimate

Higher estimate

Lower estimate

Higher estimate

Estonia

1,0%

2,4%

 €                    300 

 €                    800 

Netherlands

0,4%

1,4%

 €                3.500 

 €             12.500 

Czechia

1,5%

2,3%

 €                3.500 

 €                5.600 

Luxembourg

0,5%

1,7%

 €                    300 

 €                1.200 

Croatia

0,6%

1,8%

 €                    300 

 €                1.100 

Lithuania

0,5%

1,7%

 €                    300 

 €                1.000 

Greece

2,3%

3,6%

 €                4.100 

 €                6.500 

Cyprus

2,6%

3,0%

 €                    600 

 €                    800 

Bulgaria

3,2%

4,5%

 €                2.300 

 €                3.200 

Latvia

2,1%

3,1%

 €                    700 

 €                1.000 

Portugal

2,4%

3,2%

 €                5.200 

 €                6.900 

Germany

2,2%

3,0%

 €             80.600 

 €           107.200 

Spain

2,2%

3,0%

 €             26.400 

 €             37.100 

Austria

2,0%

3,8%

 €                8.200 

 €             15.300 

Finland

1,8%

2,4%

 €                4.500 

 €                5.900 

France

2,1%

3,0%

 €             53.300 

 €             75.400 

Slovenia

2,6%

3,2%

 €                1.400 

 €                1.700 

Italy

3,7%

4,5%

 €             66.900 

 €             81.100 

Poland

2,6%

3,5%

 €             15.000 

 €             20.200 

Malta

1,6%

2,5%

 €                    300 

 €                    400 

Hungary

2,9%

3,8%

 €                4.400 

 €                5.900 

Belgium

2,5%

3,9%

 €             12.500 

 €             19.800 

Romania

2,7%

3,7%

 €                6.500 

 €                8.900 

Slovakia

3,5%

4,6%

 €                3.500 

 €                4.600 

EU overall

2,1%

2,9%

 €           304.600 

 €           423.900 

           

EPSU urges vote against EU’s new fiscal rules