ABSTRACT
This chapter provides a critical assessment of the new EU fiscal framework (in force since April 2014), with a focus on its implications for public expenditure on the twin transition. Member states can extend the fiscal adjustment path from four to seven years if they commit to investments and reforms addressing EU priorities such as the Green Deal and digitalisation. However, the reformed framework does not provide broad-based exemptions for public investment in the twin transition. Hence, if member countries want to increase green and digital public spending, they will have to restrain welfare spending or increase taxes. Fiscal consolidation is required in several major member states to comply with the reformed EU fiscal rules. The planned increase in military spending is likely to raise government interest payments, and aversion to higher fiscal deficits must be expected to exert downward pressure on twin transition spending. The chapter presents three options to boost the fiscal space for public spending on the twin transition: (i) implementing changes to key assumptions in the technical substructure of the new fiscal framework in assessing country-specific debt sustainability; (ii) expanding national co-financing of EU programmes; and (iii) introducing an EU investment fund for climate and digitalisation.
