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March 16, 2011

So What is this New EU Semester Anyway?

Posted by Jason Harris[1]

Not this year…

In Sweden, a semester translates into a holiday or vacation. Unfortunately for all those Swedish-speaking Finance ministry officials whose holiday hopes had been raised by the recent announcement of a new EU semester, in this case it means quite the opposite. Indeed, the new EU Semester is likely to mean a busier springtime for anyone working in budget departments across Europe.

Following the endorsement of the European Economic and Financial Affairs Council in September last year, the new EU Semester requires EU Member States to submit their economic and fiscal strategies for the next three years earlier in the year and at the start of their annual budget processes. This is in contrast to previous practices, where euro-zone countries prepared their Stability Programme documents (and aspiring members produced their Convergence Programme documents) after their annual budgets were completed.

This meant that the medium-term fiscal planning and framing that the EU documents were intended to bring to the process were often treated as outputs of or add-ons to the annual budget. Rather than integrating the annual budget into a medium-term fiscal framework, and choosing policies consistent with medium-term fiscal targets, the reverse was often true. Annual budget decisions were taken to meet annual fiscal targets, then those policies were shoe-horned into the fiscal space required by the Convergence or Stability Programmes ex post, often with large (and often unidentified) adjustments required within that space. 

As a result, the medium-term fiscal projections provided in the Stability and Convergence Programmes often failed to shape future budget plans and, especially, outturns. Expenditure outcomes exceeded their planned levels more than three-quarters of the time, with revenue windfalls more often than not being spent.

And in a number of member countries where budgets are focused only on the budget year, there was little, if any consideration given to the medium term. Thus, the analysis of longer-term fiscal implications of budgetary decisions that the EC documents require happened only after the decisions had been made, and after they had been legislated: clearly the wrong order of doing business.

It also meant that there was little opportunity for the EC to provide feedback on fiscal policies, or attempt to co-ordinate across the member states, as budgets were already locked in, so any nudging of member countries’ fiscal policies would be relegated to feeding in to the following year’s budget, when conditions may have already changed considerably. 

The new semester will see the stability and convergence documents being produced earlier on in the budget cycle. The EC will provide early feed in and context setting in its Annual Growth Survey, with main economic parameters to be used across the membership and strategic advice provided in January.

Based on this input, member countries will prepare their medium-term fiscal projections as part of the stability and convergence Programme documents early on in the year, and submit the documents in mid- to late-April. These will then be assessed by the European Commission in a coordinated manner across the euro-zone, with feedback provided in July, early enough to provide an input into the annual budget process.

It is envisaged that the fiscal parameters set out in agreed Stability and Convergence Documents will play a more important role in the setting of annual budget parameters, encouraging a top-down approach to budgeting, rather than the bottom-up process that some countries currently follow, which has been a factor in some of the fiscal problems that have emerged over recent years. The movement to the new semester forms part of a broader package of EU economic governance reforms which are aimed at overcoming some of the shortcomings of fiscal policy that led to the crisis. 

By integrating the annual budget into a medium-term fiscal framework, these reforms will hopefully encourage member states to adopt a longer-term perspective in policy making – a direction that many member states are already taking of their own accord in response to the crisis. Not only will a longer-perspective in budgeting help reinforce fiscal discipline, but it can also help facilitate more strategic resource allocation, and more efficient inter-temporal planning, which benefits all players in the budgeting game.

[1] Jason Harris is a Technical Assistance Advisor at the IMF’s Fiscal Affairs Department.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.


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