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The European Commission released on 9 November 2022 a proposal to reform the framework for Member States' fiscal surveillance. The proposed new framework is based on risks to debt sustainability. For Belgium, which is highly exposed to these risks, it would imply a rapid and large-scale fiscal consolidation, and would be no less stringent than the fiscal rules previously in force and suspended since Covid-19. The proposal has not yet been adopted and still needs to be negotiated with the Member States.
This study presents a compact model that allows a stylised, yet dynamic reasoning on the main macrofiscal aggregates that are relevant for setting budgetary paths compatible with the structural budget balance requirements of the preventive arm of the Stability and Growth Pact. Some lessons on the conduct of fiscal policy in a reference framework in structural terms can be learned from the simulations provided for illustrative purposes. These simulations show in particular that – under certain conditions relating to the degree to which the budgetary adjustments have a permanent effect on the economic activity and thus on potential GDP – when the feedback effects of adjustments on the underlying macroeconomic environment are left out of consideration, this can be detrimental to the credibility of the considered structural paths.