Fiscal Rules Post-COVID: Using the Recovery Phase to Reduce Debt Ratios

The Commission has recently launched a review of the economic governance rules. One reason for this (re-)launch is that it is widely assumed that the debt reduction criterion cannot and should not be enforced when the suspension of the fiscal rules motivated by the Covid crisis ends. The main reason given is that debt levels have increased and that this makes it more difficult to reach the debt reduction target, which is one twentieth of the difference between the actual and the 60% reference value. However, this argument is wrong. The debt reduction criterion becomes easier to achieve during the post-Covid recovery phase because nominal GDP growth is higher than before the crisis, thus reducing the primary surplus required to achieve any given reduction in the debt to GDP ratio.