Brussels, 23/05/2000 (Agence Europe) - After many failed budgetary policies of the EU Member States since the early seventies and the improvement of their public finances since 1992-93 under the effect of the Maastricht convergence criteria, the aim of budgetary situations that are close to balance or in surplus is now within reach. However, in order to achieve this, the Member States should continue to maintain a "responsible" attitude even in this period of economic growth, and should decide on tax reductions only if certain criteria are fulfilled. This was declared to the press by European Commissioner Pedro Solbes, as he presented the report from Commission services on "Public Finances in EMU - 2000". The report, said Mr Solbes, is "a response to Lisbon, and in particular to the request by the summit concerning strengthened coordination of economic policies. The full text, which comprises an analysis on the latest developments and the budgetary strategies and medium-term policy initiatives of each Member State is available on Internet site http: //europa.eu.int/comm/dgs/economy-finance
The report will be a precious instrument for the Commission, stressed Mr Solbes, noting that the criteria suggested to determine whether a Member State can reduce taxation without compromising achievement of the Stability Pact (see below) had been "broadly endorsed" by the Ecofin Council on 28 February, and that there had been a more indepth discussion on this subject at the informal Ecofin Council held on 7 and 8 April in Lisbon. According to a journalist, the Swedish finance minister had affirmed that he had never discussed the matter and that, at any rate, he was "definitely against" it. Mr Solbes replied that, on 28 February, there was first of all an exchange of views within the Euro-11, and that the other Member States had then been informed during the luncheon among the Fifteen. "My interpretation", said Mr Solbes, "is that the ministers accepted the principle". He specified that the Commission does not intend to call for a "formal decision". Also, in response to a question on the point of knowing whether the ideas set out in the report meant that there is a move towards harmonisation of taxation and social protection policies, Mr Solbes replied: "not at all, we are working within the system we have. What we say is pure common sense. The ministers said that they endorse these ideas". Is Euro-11 the best forum for discussing such matters? Yes, said Mr Solbes, as this kind of coordination is more important for the countries of the Euro-zone than for the countries outside it. Will this report be mentioned at the next Ecofin Council? (on 5 June). To this question, Mr Solbes simply replied that it is a document from the "Commission services" (that he will brief, himself, on Wednesday) and is not a Commission recommendation to the Council for it to take additional measures. Of course, the report was sent to the Council, and if the future French Presidency of the Council considers it should be the subject of a debate, then the Commission would be "enchanted", added Mr Solbes.
This said, the report contains certain significant basic guidelines. It is necessary to take advantage of this phase of growth to improve the quality of public finance (through a more "refined" system) and to speed up budgetary consolidation. Thus, said Mr Solbes, the aim of budgetary situations close to balance or surplus should be reached from 2003. The report recalls that, by 2002 or 2003, eight of the Member states aim for a budget surplus and a further five expect a deficit of no more than 0.5% of GDP. What Member States have already agreed to bring forward this aim of the Stability Pact one year? Mr Solbes replied that, during the last Ecofin Council, no Member States explicitly said this but that it is known that one country is in favour of bringing the date forward (Ed. Spain, not cited).
Another major guideline: the need to find a good balance between the reduction of deficits and taxation reduction. Mr Solbes noted that the taxation burden in Europe remains very strong (in 1999, 43% of GDP of the Union, namely 14% more than in the United States and 16% more than in Japan). He pointed out that the four criteria to be verified so that a Member State may reduce taxation without danger of budgetary consolidation. We give below these criteria: (1) reductions in taxation not offset by reductions in public spending may be envisaged only in Member States which reach the medium-term aim of the budgetary situation "close to balance or in surplus"; (2) reductions in taxation must not be pro-cyclical (tax relief during a period risks causing overheating and inflationary pressures); (3) in lowering income taxes, account will have to be taken of the level of the public debt and long-term budgetary sustainability (especially the impact of the ageing of the population); (4) cuts in income taxes must come within a vast plan of reforms (notably of social security systems). The report stipulates that the Commission intends implementing these criteria when assessing the budgetary predictions for 2001 and the future updated Stability and Convergence Programmes of Member States. Which countries could today cut income taxes without risk? The analysis has to be made on a case by case basis, said Mr. Solbes. Citing the case of Ireland, he considered that the country should be cautious before taking such a step, as, although the budgetary situation is good and growth strong, it is also experiencing great risks of an increase in inflation. What country has reduced income taxes without respecting these criteria? Mr. Solbes cited France, and said that similar remarks could be leveled at Germany.
At the same time the report backs the Lisbon strategy on the need to reduce tax pressure, especially on work, in order, in particular, to encourage employment. Simulations made using the QUEST model of the European Commission demonstrate that: - general reductions in income taxes equivalent to 1% of GDP would allow for the creation of 750,000 jobs over ten years; - a similar reduction concerning the cost of labour alone, over the same period, could create a million and a half new jobs; - displacing the fiscal pressure from work to consumption (VAT) would create 500.000 new jobs.
In addition, the report places emphasis on the need to take advantage of the period of growth to tackle the problem of the ageing population, and states that, by maintaining ambitious medium-term budgetary objectives, savings made could cover a part of the cost caused by this demographic evolution. But sorting out public finances will not be enough; there will need to be reforms of the tax and social security systems that accentuate budgetary pressures linked to age, the report stresses.
Could discussion on tax topics raised in this report finally lead to a strengthening of the role of the Euro-11? "Yes, this could be an element to improve cooperation", said Mr. Solbes.
Duisenberg is "Mr. Euro" only if we speak of monetary policy
Asked to comment on the statements by ECB President Wim Duisenberg (who reacted to the further calls for an economic government and the personalisation of "Mr. Euro", saying that he himself assumed the role of "Mr. Euro"), Mr. Solbes replied: "Mr. Duisenberg is right to say "I am Mr. Euro, but only in his responsibility for monetary policy; but the Euro is something else too and there are Messrs, Euro"