EU advises caution over public finances

Prudent management of the public finances in the "good times" of economic upswing is the challenge that must be learned by EU member-states now that fiscal consolidation has been achieved or is about to be achieved, a report from the Economic Affairs Commissioner, Mr Pedro Solbes, insists.

The report warns that the buoyant tax revenues generated during a period of upswing can lead to pressure for large tax cuts and discretionary spending increases that would worsen the underlying budget position.

To the extent that growth is higher than the assumptions of the stability and convergence programmes agreed between the member-states, finance ministers should aim to surpass the targets set for budget balances.

The report attempts to put flesh on the process of multilateral economic monitoring of the Euro-11 with essentially conservative guidelines for finance ministers that emphasise debt reduction and anti-inflationary measures rather than fiscal generosity.

Commenting on the Irish experience, the report reiterates the Commission's concerns about overheating and acknowledges the "policy dillemma" faced by the Minister for Finance, Mr McCreevy, in "the context of EMU where monetary conditions are determined for the euro area as a whole. It seems that the monetary conditions applying in the euro area are probably inappropriate for an economy so advanced in the cycle as Ireland.

"That heightens the inflationary risk and fiscal policy therefore has a potential role in stabilising the economy." While noting the importance of the Government's commitment to "national understandings" with the social partners, the report nevertheless argues "that it might have been appropriate and prudent to have deferred the tax cuts in the budget and so tighten the fiscal stance; after all, there have been substantial reductions in tax pressure over the past 15 years. A postponement, may not, therefore have been seen as a weakening of the authorities' resolve to lower tax pressure in the medium term".

The report notes with approval the decision of the Government to pre-fund pensions, an important theme of the recommendations which warn that the EU's ageing population is one of the major fiscal challenges facing the Union.

Mr Solbes argues that the opportunity of a general expansion in the EU economy must be taken to improve the quality of public spending and ensuring that tax cutting programmes are sustainable in the long term and will not have to be reversed. The emphasis, as at the Lisbon economic summit, is on the need to lower the tax burden on labour with one model employed by the Commission, suggesting that a cut of 1 per cent of GDP in the tax burden could create three-quarters of a million jobs. The employment effect would be doubled, the report says, if the tax cuts were targeted specifically at labour costs.

The report is available at http://europe.eu.int/comm/dgs/economy