European Union does not rule out leaving tax rules suspended in 2023 by Ukraine

The European Commission (EC) will evaluate in the spring whether it goes ahead with its plan to reactivate the European fiscal discipline rules in 2023, since it expects that the Russian invasion of Ukraine will slow down its economic recovery after the pandemic, although it does not foresee that make it “derail”.

The Community Executive presented this Wednesday its preliminary budgetary policy guidelines for the countries of the European Union (EU) for 2023, in which it advocates initiating a “gradual fiscal adjustment” to guarantee the sustainability of a debt that skyrocketed by COVID-19, but warns that policies will have to adapt to the “uncertain” economic situation.

Although it is early to anticipate the impact that the Russian invasion of Ukraine will have on the EU, which has economically sanctioned Moscow, “the attack will probably negatively impact growth”, advanced the European Commissioner for the Economy, Paolo Gentiloni, in the presentation of the document.

Among the risk factors he cited the impact on financial markets, “more persistent” supply chain bottlenecks, pressure on energy prices and the impact on consumer confidence.

“This combination of factors and risk will likely weigh significantly on the economic expansion in the EU, but without derailing it,” Gentiloni said, referring to growth that Brussels estimated at 4% for this year in early February.

With these forecasts in hand, Brussels planned to stop applying the safeguard clause next year by which the deficit and debt control rules were frozen in 2020 to allow it to respond with enormous public spending to the pandemic, but the situation in Ukraine could force a reconsideration of the strategy.

“Given the current uncertainty, we will reassess the planned deactivation of the safeguard clause in 2023,” Gentiloni said, adding that this analysis will be carried out based on the spring economic forecasts published by the Commission in May to see the economic impact of the crisis.

“Inevitably, our sanctions (on Moscow) will have negative implications for the economy, but it is a price worth paying to defend democracy and peace,” added the vice president of the Community Executive, Valdis Dombrovskis.

Against this background, the guidelines published today by the Community Executive call to continue closely coordinating the fiscal policies of the Twenty-seven in 2023 and to guarantee the sustainability of the debt through a “gradual” fiscal adjustment, combined with investments and reforms that promote sustainable growth.

The fiscal strategies, the Commission points out, should take into account the support that the States will receive from the post-pandemic recovery fund of 800,000 million euros and be differentiated depending on the situation of each country.

Highly indebted member states “should start a gradual debt reduction”, limiting the increase in spending and undertaking a fiscal adjustment in 2023, without taking into account contributions from the recovery fund or other transfers from the EU, says the Commission.

The adjustment is not so urgent for those with medium or low levels of debt, to whom Brussels recommends reinforcing investments for the ecological and digital transition, having a “neutral” fiscal position.

The Commission warns, in any case, that “a consolidation that is too abrupt could have a negative impact on growth” and calls for financing “high-quality” investments favorable to growth with national budgets.

These recommendations will be adapted as the situation evolves and, at the latest, in May in order for the governments to prepare their budgets for 2023.

In parallel, the Commission continues to work on the reform of fiscal rules with the aim of reaching a consensus among the Twenty-seven before next year.