EU calls for united effort on tax cuts and spending

 

THE EUROPEAN Commission will call on member states to co-ordinate a round of tax cuts and increases in public spending today in an attempt to stave off a long-lasting recession in Europe.

It will also ask the European Central Bank to cut interest rates further as part of an economic stimulus package that is expected to pump at least €130 billion into the European economy.

"The EU needs a co-ordinated approach, big enough and bold enough to restore consumer and business confidence . . . All member states will need to take action to deal with the crisis," says the draft proposal, which will be finalised by commissioners today.

The final size of the proposed stimulus package is expected to amount to about 1 per cent of European gross domestic product (GDP), or €130 billion.

Commission president José Manuel Barroso has consulted with EU states to try to get agreement on the proposal, given initial concerns in Germany and the Netherlands. In a joint article in France's Le Figaro and Germany's Frankfurter Allgemeine Zeitung, Nicolas Sarkozy and Angela Merkel say the 1 per cent figure is a "good target" for national governments to match if they could.

EU states will not be forced to follow the commission proposal, which acknowledges that states have different starting points in terms of fiscal room for manoeuvre. But one commission official noted yesterday that co-ordinating action was important to prevent negative spillover effects occurring when states took action.

One example cited in off-the-record briefings in Brussels yesterday was the recent decision by Ireland to increase VAT rates by 0.5 per cent while its closest neighbour Britain cut VAT temporarily by 2.5 per cent.

The commission says the national budget stimulus packages should be timely, temporary, targeted and co-ordinated to ensure maximum impact.

They should also comply with the stability and growth pact, although there will be significant flexibility allowed for states to breach the 3 per cent budget deficit limit.

"The budgetary stimulus should be foreseen for a maximum period of two years (2009-2010) following which member states' budgets should commit to reverse the budgetary deterioration and return to the aims set out in the medium-term objectives," says the proposal, which argues that a longer timeframe for tax cuts would only persuade consumers to save rather than spend, reducing the overall impact of the fiscal package.

The commission says public spending will generally have a stronger positive impact on demand in the short run compared with tax cuts. It proposes speeding up disbursement of €347 billion EU cohesion funds available between 2007-2013 and providing extra cash for car makers and construction firms to invest in energy efficiency.

On taxation measures it asks member states to consider temporary cuts in VAT and reductions in income tax for low-paid workers to stimulate demand in Europe.

EU stimulus package: Main points

States should provide an economic stimulus worth at least €130 billion.

Measures should last only two years. Member states should commit to getting budget deficits under control after this period.

Excessive deficit procedures will be imposed on states breaching the 3 per cent limit in the stability and growth pact. But they get more time to return deficits to acceptable levels using flexibility within the pact.

The ECB has scope for further cuts in interest rates.

States should use financial support provided to encourage banks to return to lending.

States should recapitalise the European Investment Bank by year-end. The EIB will provide €30 billion in loans for businesses in 2009/10. It will provide €6 billion to support climate change projects.

The commission will speed up payment of structural funds to encourage an immediate hike in public spending.

States should consider temporary VAT cuts to support consumption, and adopt a new directive to make permanent cuts in VAT rates for labour- intensive services. The commission will also propose lower VAT rates for "green" products and services.

States should consider reducing taxes for lower-income groups to promote employment of lower-skilled workers.

The commission will relax state aid rules to allow state support for businesses.

A new European "green cars" initiative will provide as yet unspecified funds for the automobile sector, while the construction sector will benefit from €1 billion to promote energy efficiency. Several billion euro will also be provided for broadband projects.