Euro zone public finances have improved last year as most budget deficits narrowed, but safeguarding the gains will be a challenge amid slowing growth, and high inflation, the European Commission said today.
The European Union Executive arm said in a statement the budget deficit for the 15 members of the single currency area more than halved to 0.6 per cent of GDP last year.
"Despite this progress, EU Member States are still facing a number of major challenges that leave little room for complacency on fiscal policies," the commission said.
"The current economic juncture with strong inflationary pressures is reducing the room for manoeuvre in the conduct of policies," it said, adding some economic growth projections in euro zone countries were likely to prove optimistic.
The commission expects the euro zone budget deficit to widen to 1.0 per cent of GDP this year and 1.1 per cent in 2009 unless policies change.
Some of the higher tax revenues that helped improve budget balances over the last two years were windfall gains from higher economic growth that may disappear now that economic activity was expected to slow, the commission said.
It was also sceptical of government plans to cut expenditure and lower the tax burden, pointing out that in the past two thirds of the planned budget improvements were not reached and three quarters of government expenditure targets were overshot.
The commission pointed out that those countries which reached a budget close to balance or in surplus had more room to adjust policies as economic growth slows. Others, like France where the budget deficit actually grew last year instead of falling, would have a more difficult task in avoiding a breach of the EU's budget deficit ceiling of 3 per cent of GDP.
It forecast the French deficit would rise to 2.9 per cent of GDP in 2008 from 2.7 per cent in 2007 and to 3 per cent in 2009.
The commission also said euro zone EU members should pay more attention to how they spend public money and on what, in order to maximise efficiency.