New EU fiscal rules: a democratic deficit

The proposed new rules would give member states more role in defining their ‘fiscal paths’—just not parliaments.

In a recent article, Philipp Heimberger argued that the reformed European Union fiscal framework on the table contained sensible elements but could be improved. One of the areas he identified as problematic was lack of parliamentary involvement in the national budget-making process.

As a parliamentarian myself, I have seen first-hand what little influence MPs have over national budgets and thus over the politics of money more generally. This should be alarming.

The annual budget law effectively determines the trajectory of economic development—it shapes and reflects social norms, enabling one to see what a society values. A new housing fund, for example, is not just a financial instrument: it represents a political decision to value shelter for the public rather than leave it to individuals and the market.

Parliaments should be the sites where such values are debated and contested. Yet this is far from the case, at least in my own national parliament in Latvia. And the fiscal reform proposed by the European Commission may further impede democratic control over budgetary policy.

‘Too much democracy’

If a major reform is to be viable, it needs to offer a sensible deal to the main stakeholders. The commission claims that, under its proposal, the role of member states in designing their ‘fiscal paths’ will actually increase.

They will be expected to come up with four-year plans outlining necessary reforms and investments to help meet fiscal targets and address any macroeconomic imbalances while ensuring growth. In return, the commission will assume more ‘policing’ functions, assessing and monitoring these plans and, if necessary, enforcing compliance with the general accounting rules.

This might seem a fair deal. Yet it is likely that national parliaments will be further removed from meaningful oversight. The institutional structure of the eurozone reflects the belief that the politics of money has to be safeguarded from ‘too much democracy’, since politicians cannot be trusted with prudent housekeeping.

If budgetary policy were, in fact, democratic it should be the national parliaments exercising the functions of assessment, monitoring and compliance. This would enable MPs to have a meaningful say over how resources are organised, distributed and consumed. But if these functions are further delegated to the commission, national parliaments become little more than accessories in the grand game of fiscal power.

Futility and absurdity

The current rules, suspended since March 2020 owing to the pandemic, already constrained parliaments in exercising their power over fiscal matters. This was evident in the larger scheme of things as much as in minute, day-to-day, political work. On a general level, the rules concerning permissible debt and deficits fulfil not an economic but a political function.

Economically heterodox scholars have sweated many hours trying to demonstrate the futility and absurdity of these accounting rules—and, from an economic point of view, they are obviously correct. Yet it is equally futile to argue against these rules on the grounds of economics, since their role is simply to discipline parliaments, drawing a clear line in the balance sheet under which no more entries are allowed. In practice, this encourages poor budget-making, since the quality of a proposal is measured not by its content but by whether associated expenditure slips in under the permitted deficit.  

The undemocratic nature of the fiscal framework however becomes apparent in more mundane matters. There is a clear asymmetry in terms of information, knowledge and capacity among parliaments, finance ministries and the commission. When a Ministry of Finance presents an initial budget project to its parliament, this is already over-determined by macroeconomic assumptions regarding the scope for action.

Even if MPs comprehend the meaning of a ‘structural’ deficit (as against cyclical swings), how ‘potential’ gross domestic product is calculated and associated ‘output gaps’ are derived, it is not possible to object to their use and significance in the first place. One can only ask ‘difficult’ questions to illustrate how political these technical terms and assessments are—without much hope of changing them.

Equally controversial

The new fiscal framework is supposed to do away with the widely contested ‘output gaps’. Yet the ‘debt sustainability analysis’ at the heart of it will likely prove equally controversial. On the surface, this will (again) be a technical device, this time calculating the trajectory of a country’s debt. But it will naturally be based on forecasts about growth and the effects of public spending which contain many technical assumptions likely to remain obscure to most MPs—and thus beyond question.

Most parliaments are unlikely to have the necessary capacity to delve into such issues and will simply accept the analysis brought forward, although it yields a specific amount as to what the country is allowed to spend in the coming year. This reduces the potential capacity of MPs to accommodate forecasts to the actual socio-economic needs of the country. Even investment projects with a clear long-term benefit will likely be rejected on the basis of accounting rules favouring short-term planning.

To be fair, this is not all the fault of the commission and there are plenty of things national parliaments can do to enhance their oversight over the budget. But, even now, a member-state’s government is incentivised to minimise the role of its parliament in the process: it asks for commission approval over the planned budget before it consults parliament and any meaningful change requires further commission approval, dragging out decision-making in a way any government wishes to avoid. If the seal of approval from the parliament were to precede that of the commission, this would already introduce more democracy and make MPs bigger stakeholders.

The new fiscal framework is going to be a step in the right direction. But its democratic adequacy can best be gauged by the debate in each parliament about the framework itself. Meaningful debate is however likely to be absent—illustrating just how parliaments have been consistently excluded from these decisions.