Commission warns on budget deficits

The European Union may be repeating the mistakes of the past by failing to cut budget deficits quickly enough during an economic…

The European Union may be repeating the mistakes of the past by failing to cut budget deficits quickly enough during an economic upswing, the European Commission said today.

According to EU budget rules, the Stability and Growth Pact, EU members should aim to have a budget close to balance or in surplus over the medium term and should use fast economic growth to achieve that goal quickly.

Euro zone members should cut their budget deficits by at least 0.5 per cent of gross domestic product in "economic good times" - a target many ignore. "In some cases tax windfalls, which may be of a temporary nature, were partly used to finance increases in government expenditure," the Commission said in a statement.

"This shift suggests a risk that past policy mistakes are being repeated. The current configuration of rapid economic growth and positive surprises in tax revenues closely resembles the situation that prevailed at the turn of the decade, during which policy mistakes were made," it said.

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The EU executive proposed that EU governments be clearer about how they want to achieve their multi-annual budget deficit reduction targets and discuss these plans with their national parliaments to get their support. Governments should also base their plans on realistic assumptions and explain if the targets they set for coming years are based on a scenario of unchanged policies or whether additional measures would have to be taken and, if so, what.

"In 2006, fiscal consolidation efforts of some countries not yet at their medium-term objective were insufficient given the improving cyclical conditions," the Commission said.

According to the Commission's May 7th economic forecasts based on the assumption of no policy change, only 10 of the 27 EU countries will have reached their medium-term objective in 2008, despite two consecutive years of above-trend economic growth. "Fiscal plans are also somewhat disappointing," the Commission said