The report published by the Commission on the EU public finances sets out how Member States' fiscal policies have evolved in the wake of the current crisis. It also proposes a set of reforms to put prevention and debt reduction at the centre of EU budgetary surveillance.

The Commission published the 2011 Public Finances Report that takes a look at the recent developments in public finances, analyses new ways of assessing debt sustainability and describes the changes to budgetary surveillance in the EU. The report proposes to consolidate some reforms already introduced to control the EU debt increase. The debt to GDP ratio is continuing to rise and is set to reach 83.3% of GDP in 2012 – an increase of over 20 points of GDP from its level of 2007. The consolidation measures that have been introduced are addressing this rising level, and the Member States have indicated plans to intensify these in their Stability and Convergence Programmes. The challenge is therefore to ensure those plans that would lead to debt stabilising by 2012 are indeed put into practice while preserving appropriate differentiation across Member States in accordance with available fiscal space. The report also shows the link between budgetary frameworks and sovereign spreads. Countries with the highest deficits and debt have the most to gain from an improvement in their fiscal governance in terms of a reduction in their spreads.

Olli Rehn, the Economic and Monetary Affairs Commissioner, underlined that in a period of high and still increasing debt levels in EU countries, ensuring the sustainability of public finances is a prerequisite for enduring economic growth and job creation. He also reminded to Member States that they must continue to deliver on reaching their fiscal targets, facing market pressures. Mr Rehn also added that Member States with fiscal room of manoeuvre should allow automatic stabilisers to function to mitigate the effects of a slowdown of the recovery on activity and jobs while sticking to their structural adjustment paths. Finally he stressed how important is to adopt soon the legislative package to reinforce the economic governance whose final vote has been postponed, especially after the recent developments.

The EU response to the lessons of the fiscal crisis is, according to the report published, the legislative package that contains six pieces, of which four relate to budgetary policy. The reform will introduce an expenditure rule into the preventive arm of the Pact, and will make the debt criterion operational in the corrective arm, while introducing sanctions to the preventive arm for the first and intensifying those in the corrective arm.

Furthermore, the Commission report introduces some suggestions on how the EU's current sustainability analysis can be improved with additional methodologies. First it presents methodologies which assess the risks posed by the financial sector and by macro-financial imbalances to sustainability. Then, fiscal reaction functions and the effect of tax increases on revenue streams are incorporated into standard analysis. The analysis shows that EU countries are currently making historically large fiscal consolidation efforts, and assesses the cost in terms of future GDP of consolidating public finances via increased taxation.