IDEAS home Printed from https://ideas.repec.org/p/wii/pnotes/pn94.html
   My bibliography  Save this paper

The new EU fiscal framework: Implications for public spending on the green and digital transition

Author

Listed:

Abstract

This paper provides a critical assessment of the new EU fiscal framework, with a focus on its implications for public expenditure on the twin green and digital transition. According to the reformed rules, member states may commit to a package of investment and reform to extend the fiscal adjustment path from four years to a maximum of seven years, provided the European Commission agrees that the package meets predefined criteria, including the contribution to EU priorities (in particular, the European Green Deal and the EU digital strategy). However, the reformed framework does not provide any broad-based exemption for public investment in the twin transition, although the necessary large expansion in public assets is rather unlikely, given the requirement to reduce public liabilities relative to output over the medium term. This implies that, if member countries want to increase green and digital public spending, they will have to make room for it either by restraining other spending items (e.g. social protection, health or education) or by increasing taxes. A major fiscal consolidation will be required in a number of (big) euro area countries from 2025 onwards to comply with the reformed EU fiscal rules. However, the temporary exemption for additional defence spending will make the overall fiscal stance in EU countries more expansionary than it would otherwise have been. There is now a political focus in the EU on industrialisation through rearmament. The pressure to go for additional deficit-financed defence spending will, however, eventually raise the share of government interest payments in total tax revenue, and the political aversion to higher fiscal deficits must be expected to exert downward pressure on public spending on the green and digital transition. Against that background, this paper discusses three options for how to boost the fiscal space for the required additional public spending on the twin transition implementing changes to key assumptions in the technical substructure of the new fiscal framework when it comes to assessing country-specific debt sustainability; expanding national co-financing of EU programmes; and introducing an EU investment fund for climate and digitalisation.

Suggested Citation

  • Philipp Heimberger, 2025. "The new EU fiscal framework: Implications for public spending on the green and digital transition," wiiw Policy Notes 94, The Vienna Institute for International Economic Studies, wiiw.
  • Handle: RePEc:wii:pnotes:pn:94
    as

    Download full text from publisher

    File URL: https://wiiw.ac.at/the-new-eu-fiscal-framework-implications-for-public-spending-on-the-green-and-digital-transition-dlp-7281.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Benjamin Born & Gernot J. Müller & Johannes Pfeifer, 2020. "Does Austerity Pay Off?," The Review of Economics and Statistics, MIT Press, vol. 102(2), pages 323-338, May.
    2. Roel Beetsma & Marco Buti, 2024. "Promoting European Public Goods," EconPol Forum, CESifo, vol. 25(03), pages 37-41, May.
    3. repec:spo:wpmain:info:hdl:2441/2gtm5um5lm9vvo08gf2gn4a066 is not listed on IDEAS
    4. Jean-Marc Fournier, 2016. "The Positive Effect of Public Investment on Potential Growth," OECD Economics Department Working Papers 1347, OECD Publishing.
    5. Reljic, Jelena & Zezza, Francesco, 2025. "Breaking the divide: Can public spending on social infrastructure boost female employment in Italy?," Economic Modelling, Elsevier, vol. 143(C).
    6. Jean Pisani-Ferry, 2021. "Climate policy is macroeconomic policy, and the implications will be significant," Policy Briefs PB21-20, Peterson Institute for International Economics.
    7. Campos, Nauro F. & De Grauwe, Paul & Ji, Yuemei, 2025. "Structural reforms and economic performance: the experience of advanced economies," LSE Research Online Documents on Economics 120870, London School of Economics and Political Science, LSE Library.
    8. Barry Eichengreen & Ugo Panizza, 2016. "A surplus of ambition: can Europe rely on large primary surpluses to solve its debt problem?," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 31(85), pages 5-49.
    9. Grégory Claeys & Zsolt Darvas & Alvaro Leandro, 2016. "A proposal to revive the European Fiscal Framework," Bruegel Policy Contributions 13490, Bruegel.
    10. Jérôme Creel & Mario Holzner & Francesco Saraceno & Andrew Watt & Jérôme Wittwer, 2020. "How to Spend it: A Proposal for a European Covid-19 Recovery Programme," wiiw Policy Notes 38, The Vienna Institute for International Economic Studies, wiiw.
    11. Francesco Zezza & Dario Guarascio, 2024. "Fiscal policy, public investment and structural change: a P-SVAR analysis on Italian regions," Regional Studies, Taylor & Francis Journals, vol. 58(6), pages 1356-1373, June.
    12. Heimberger Philipp & Welslau Lennard & Schütz Bernhard & Gechert Sebastian & Guarascio Dario & Zezza Francesco, 2024. "Debt Sustainability Analysis in Reformed EU Fiscal Rules: The Effect of Fiscal Consolidation on Growth and Public Debt Ratios," Intereconomics: Review of European Economic Policy, Sciendo, vol. 59(5), pages 276-283.
    13. Nauro F. Campos & Paul De Grauwe & Yuemei Ji, 2025. "Structural Reforms and Economic Performance: The Experience of Advanced Economies," Journal of Economic Literature, American Economic Association, vol. 63(1), pages 111-163, March.
    14. Ilzetzki, Ethan, 2025. "Guns and growth: The economic consequences of defense buildups," Kiel Report 2, Kiel Institute for the World Economy (IfW Kiel).
    15. Zsolt Darvas & Lennard Welslau & Jeromin Zettelmeyer, 2023. "A quantitative evaluation of the European Commission’s fiscal governance proposal," Bruegel Working Papers node_9364, Bruegel.
    16. Christoph Paetz & Sebastian Watzka, 2024. "The New Fiscal Rules - another round of austerity for Europe?," IMK Policy Brief 176-2024, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    17. repec:hal:spmain:info:hdl:2441/2gtm5um5lm9vvo08gf2gn4a066 is not listed on IDEAS
    18. O'Connell, Marguerite & Abraham, Laurent & Oleaga, Iñigo Arruga, 2023. "The legal and institutional feasibility of an EU Climate and Energy Security Fund," Occasional Paper Series 313, European Central Bank.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jan Priewe, 2020. "Why 60 and 3 percent? European debt and deficit rules - critique and alternatives," IMK Studies 66-2020, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    2. Reljic, Jelena & Zezza, Francesco, 2025. "Breaking the divide: Can public spending on social infrastructure boost female employment in Italy?," Economic Modelling, Elsevier, vol. 143(C).
    3. Heimberger Philipp & Welslau Lennard & Schütz Bernhard & Gechert Sebastian & Guarascio Dario & Zezza Francesco, 2024. "Debt Sustainability Analysis in Reformed EU Fiscal Rules: The Effect of Fiscal Consolidation on Growth and Public Debt Ratios," Intereconomics: Review of European Economic Policy, Sciendo, vol. 59(5), pages 276-283.
    4. Jan Priewe, 2021. "Reforming the Fiscal Rulebook for the Euro Area – and the Challenge of Old and New Public Debt," IMK Studies 72-2021, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    5. Jung, Alexander & Romelli, Davide & Farvaque, Etienne, 2025. "Do central bank reforms lead to more monetary discipline?," Working Paper Series 3049, European Central Bank.
    6. Roel Beetsma, 2022. "The Economics of Fiscal Rules and Debt Sustainability," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 57(1), pages 11-15, January.
    7. Dorothée Allain-Dupré & Claudia Hulbert & Margaux Vincent, 2017. "Subnational Infrastructure Investment in OECD Countries: Trends and Key Governance Levers," OECD Regional Development Working Papers 2017/05, OECD Publishing.
    8. Oguzhan Akgun & David Bartolini & Boris Cournède, 2017. "The capacity of governments to raise taxes," OECD Economics Department Working Papers 1407, OECD Publishing.
    9. Burilkov, Alexandr & Wolff, Guntram B., 2025. "Europa ohne die USA verteidigen: eine erste Analyse, was gebraucht wird [Defending Europe without the US: First estimates of what is needed]," Kiel Policy Brief 183, Kiel Institute for the World Economy (IfW Kiel).
    10. Doris Prammer & Lukas Reiss, 2018. "How to increase fiscal stabilization at the euro area level?," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue Q2/18, pages 111-131.
    11. Coenen, Günter & Lozej, Matija & Priftis, Romanos, 2024. "Macroeconomic effects of carbon transition policies: An assessment based on the ECB’s New Area-Wide Model with a disaggregated energy sector," European Economic Review, Elsevier, vol. 167(C).
    12. Moritz Cruz & Armando Sánchez‐Vargas, 2022. "Government spending and the exchange rate: Exploring this relationship in Mexico using a cointegrated system of equations," Review of Development Economics, Wiley Blackwell, vol. 26(1), pages 587-605, February.
    13. Debra Bloch & Jean-Marc Fournier & Duarte Gonçalves & Álvaro Pina, 2016. "Trends in Public Finance: Insights from a New Detailed Dataset," OECD Economics Department Working Papers 1345, OECD Publishing.
    14. Åsa Johansson, 2016. "Public Finance, Economic Growth and Inequality: A Survey of the Evidence," OECD Economics Department Working Papers 1346, OECD Publishing.
    15. Mahsa Jahandideh, 2020. "Resource‐driven victory," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(4), pages 877-898, August.
    16. repec:spo:wpmain:info:hdl:2441/2gtm5um5lm9vvo08gf2gn4a066 is not listed on IDEAS
    17. Robert Stehrer & Vasily Astrov & Richard Grieveson & Bernhard Moshammer & Roman Stöllinger & Harald Oberhofer & Yvonne Wolfmayr, 2022. "FIW-Jahresgutachten. Die österreichische Außenwirtschaft 2022," WIFO Studies, WIFO, number 69396, August.
    18. Bartzokas, Anthony & Giacon, Renato & Macchiarelli, Corrado, 2022. "Exogenous shocks and proactive resilience in the EU," MERIT Working Papers 2022-025, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    19. Niels D. Gilbert & Jasper F.M. Jong, 2017. "Do European fiscal rules induce a bias in fiscal forecasts? Evidence from the Stability and Growth Pact," Public Choice, Springer, vol. 170(1), pages 1-32, January.
    20. Katia Berti & Eugeniu Colesnic & Cyril Desponts & Stephanie Pamies & Etienne Sail, 2016. "Fiscal Reaction Functions for European Union Countries," European Economy - Discussion Papers 028, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    21. Maria Demertzis & Guntram B. Wolff, 2020. "What are the prerequisites for a euro area fiscal capacity?," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 23(3), pages 342-358, July.

    More about this item

    Keywords

    Green transition; digital transition; EU fiscal rules; public investment; fiscal policy; austerity;
    All these keywords.

    JEL classification:

    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wii:pnotes:pn:94. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Customer service (email available below). General contact details of provider: https://edirc.repec.org/data/wiiwwat.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.