MNI BRIEF: Commission Expects Over-Optimistic EU Budget Plans

Eurozone finance ministers will be warned by the European Commission on Monday that draft budget plans for 2023 could prove “overly optimistic” as rates continue to rise, a senior EU official said.

“The [2022] fiscal outturn is going to be flattered by high inflation which improves outturns in the short run but in the medium run the effect will turn the other way when high interest rates start affecting debt-servicing costs,” the official said, adding that states’ depictions of underlying fiscal positions are likely to be flattered by inflation-driven increases in nominal GDP.

Actual fiscal outcomes are also likely to exceed those in draft budgetary plans because they will include measures to compensate for high energy prices which have yet to be legislated, the official noted. (See MNI: EU Fiscal Scolding Seen Falling On Deaf Ears)

Monday’s Eurogroup meeting is likely to to issue a statement confirming the importance of coordination of fiscal policy and energy-support measures, the official said, adding that the statement might also include a recommendation that aid to households dealing with higher energy prices should only cover a limited and reasonable amount of household consumption, with any excess charged at market cost.