IP/08/1001

Brussels, 25 June 2008

Quality of public finances is key to improving sustainability, increasing economic growth and the smooth functioning of EMU

Raising the quality of public finances, in other words getting value for taxpayers' money, is key to improving the sustainability of public finances. It should also help raise the growth potential of the European Union by enabling resources to be freed to reduce debt, lower taxes and invest more, including in human capital. The Commission Communication accompanying the 2008 Public Finances Report identifies a number of areas for action regarding the way governments formulate, implement, and assess their budgetary strategies as well as how the preventive arm of the Stability and Growth Pact can be more effective in supporting the achievement of sustainable finances while contributing to higher growth and employment and a better functioning Economic and Monetary Union. The proposals build on the 2005 SGP reform and the May 2008 Commission Communication on EMU@10.

"Although the budgetary situation has improved remarkably in the last few years, it is quite clear that there is still scope for progress in enhancing the quality of public finances. The benefits of sound fiscal policies are clear: reducing deficits and debts and generally improving the quality of budgets would enable Member States to free the necessary resources to encourage innovation, investment, education and employment which, in turn, would allow them to face more confidently the challenges posed by globalisation and an ageing population", said Joaquín Almunia, Economic and Monetary Affairs Commissioner.

The Commission today adopted a Communication to Parliament and the Council on the role of quality of public finances in the EU governance framework. It accompanies and draws on the 9th annual Report on Public Finances, also released today. The Communication argues that better quality is not just an end in itself but could also allow synergies between the main instruments of EU economic policy coordination. It should for example enable better linking of the different instruments of economic governance, specifically the Stability and Growth Pact (SGP) and the Lisbon Strategy for Growth and Jobs.

In 2007 the budgetary situation improved markedly. The EU's average deficit was reduced to 0.9% from 1.4% in 2006 (and to 0.6% from 1.3% in the euro area). Reflecting the improvement of fiscal balances, the level of outstanding debt stayed on a clear downward path. In the EU as a whole it has already fallen to below the Treaty reference value of 60% of GDP, while in the euro area it is approaching that figure.

This development reflected continued progress in the correction of excessive deficits. In January 2006, no fewer than twelve countries were subject to the procedure under the dissuasive arm of the Pact. Two and a half years on, the number is down to two, Hungary and Poland, and in the case of the latter the possible abrogation of the procedure will be discussed at the July Ecofin. Since last year's public finances report was published, the Council has abrogated the excessive deficit procedure for five countries, including most recently the Czech Republic, Italy, Portugal and Slovakia. However, the Commission is closely considering the situation in the UK as its budgetary prospects have deteriorated.

Despite this progress, Member States still face a number of major challenges that call for further progress on fiscal policies. First and foremost, potential GDP growth in many Member States is still constrained by an inefficient use of resources, including by the public sector. At the same time, the current strong inflationary pressures are reducing the room for manoeuvre in the conduct of policies. Second, the ongoing process of population ageing will make the consolidation of public finances difficult to sustain unless it is continued and accompanied by structural reforms. And third, increasing exposure to global competition puts pressure on EU governments to reconsider the relatively high tax, administrative and regulatory burden in Europe and to improve provision of public services and goods, so as to deliver much-requested better value for money.

In the light of the need to ensure sustainability of public finances and to foster long-term economic growth and the smooth functioning of EMU, and drawing on the broad principles laid out in the “EMU@10” Communication of May 2008, the Commission identifies four areas for action to improve the focus on the quality of public finances:

• More systematic and comprehensive reporting on improvements of quality of public finances and on structural reforms in the context of the Stability and Convergence Programmes is called for. This step towards developing a more systematic approach for assessing the efficiency of public spending would be of help in gauging the quality of public finances overall.
• Member States are invited to move towards budgetary procedures that take performance into account. Regular budget reviews, including efficiency analysis, could also be instrumental for expenditure prioritisation.
• Enhancing the effiency of tax systems is an important part of a comprehensive strategy to revitalise European economies. The key objective is to have simple rules and broad tax bases, while avoiding loopholes, inefficient tax expenditures, special tax regimes and unnecessary exemptions. Easing the high tax burden on labour by shifting to other tax bases may be one way forward.
• A regular review of the quality of public finances in the Member States, conducted jointly by the Economic Policy Committee and the Commission in line with tried and tested methods of collaboration, could strengthen the focus on the quality of public finances in the surveillance framework and spotlight its relevance for the Strategy for Growth and Jobs.

Report and Communication available on:

http://ec.europa.eu/economy_finance/thematic_articles/article12804_en.htm