Significant fall in average euro-zone budgetary deficit

The average budgetary deficit in the euro zone fell significantly last year, new figures from the European Union's official statistics office reveal.

When measured as a share of gross domestic product (GDP), the average euro zone general government deficit (GGB) fell to 1.6 per cent in 2006, compared with 2.5 per cent in 2005, Eurostat said yesterday.

Eurostat also said government debt in the euro zone shrank to 69per cent of GDP last year from 70.5 per cent in 2005. According to EU rules, debt should not exceed 60per cent of GDP.

Economists said the improvement was caused by economic growth boosting tax revenue, rather than government spending curbs. Euro zone economic growth was 2.7per cent last year, almost double the 2005 rate and the fastest expansion since 2000. The commission expects growth of 2.4 per cent this year.

"Most of the improvement in the fiscal balance appears to have stemmed from stronger growth . . . rather than from expenditure restraint or major fiscal reforms," said Sandra Petcov, an economist at Lehman Brothers.

As a share of GDP, euro zone tax revenues rose by 0.7 percentage points to 45.8 per cent, while spending remained broadly constant at 47.4 per cent, she said.

The region's biggest economy, Germany, slashed its budgetary shortfall to 1.7 per cent from 3.2 per cent in 2005, according to the figures. In Ireland, the budget surplus jumped to 2.9 per cent from 1 per cent, while Ireland's debt to GDP ratio debt fell to 24.9 per cent from 27.4 per cent, one of the lowest ratios in the EU.

The improved outlook encouraged euro zone finance ministers to agree to balance their budgets by 2010. In November 2003, Germany and France combined forces to suspend the operation of the pact so as to avoid punishment for exceeding its 3 per cent limit on budgetary deficits. They later agreed to resume efforts to reduce their deficits.

European Central Bank president Jean-Claude Trichet welcomed the pledge to continue fiscal discipline, but hinted that it would not prevent the ECB from raising interest rates if it felt this was needed.