Select Committee on European Scrutiny Third Report



COM(00) 846

Commission Communication: The contribution of public finances to growth and employment: improving quality and sustainability.

Legal base:
Document originated: 21 December 2000
Deposited in Parliament: 12 January 2001
Department: HM Treasury
Basis of consideration: EM of 15 January 2001
Previous Committee Report: None
To be discussed in Council: 19 January 2001
Committee's assessment: Politically important
Committee's decision: Cleared, but further information requested


  15.1  In March 2000, the Lisbon European Council requested the Council and the Commission to present a report to the spring 2001 European Council assessing the contribution of public finances to growth and employment.

The document

  15.2  The Commission has published a Communication to the Council and the European Parliament intended to serve as a basis for the joint Council-Commission report. It examines whether Member States are taking adequate concrete measures to:

  • alleviate the tax pressure on labour, particularly the unskilled and low paid, and improve the employment and training incentive effects of tax and benefit systems;

  • redirect public expenditure towards increasing the relative importance of capital accumulation (both human and physical) and supporting research and development, innovation and information technologies; and

  • ensure the long-term sustainability of public finances, examining the different dimensions involved, including the impact of aging populations.

  15.3  The first section of the report examines the ways in which public finances can affect growth and employment.

  15.4  The second section discusses the challenge of maintaining sound public finances in the context of the goal of the Stability and Growth Pact of budgets "close to balance or in surplus". It examines, on the basis of several criteria, whether recent tax reforms in a number of Member States can achieve a sustainable reduction in taxes while maintaining a commitment to fiscal discipline. It invites Member States to examine the merits of the criteria in question for assessing tax cuts and the scope for their implementation, as part of the budgetary surveillance process at EU level.

  15.5  The third section encourages Member States towards a more employment-friendly tax and benefit system in order to reduce the fiscal burden on labour, which in many Member States remains high by international standards. It suggests that the moves made by Member States to tighten benefit entitlement conditions and, through that, to support active participation in the labour market should be "speeded up, reinforced and intensified".

  15.6  The fourth section assesses the contribution of public finances to a knowledge-based economy.

  15.7  The final section considers the long-term sustainability of public finances, highlighting in particular the doubling of the old-age dependancy ratio in the next fifty years, which the Commission sees as a principle reason for continued fiscal consolidation and reduction of debt at a faster pace to offset the inevitable increase in public spending. It argues that labour market reforms, through tax and benefit systems, need to be made to increase employment rates, and that further reforms to pension systems are needed if long-term stability is to be achieved.

The Government's view

  15.8  In his Explanatory Memorandum of 15 January 2001, the Financial Secretary to the Treasury (Mr Stephen Timms) says that the Communication will inform a joint Council-Commission report to the Stockholm European Council in spring 2001 and that it will help to ensure that the variety of policy measures agreed at the Lisbon European Council take full account of their public finance implications. He notes that the Communication is non-binding and says that the Government:

    "stresses the need to leave Member States discretion to determine what combination of tax and spending reforms will best promote growth and employment in the light of local circumstances. Tax policy remains the responsibility of Member States."


  15.9  As the Minister says, this Communication is non-binding and the views in the report for the European Council will need to take account of Council consideration of the document. This will begin at the ECOFIN meeting on 19 January. We note, in particular, the reference to specific criteria which the Commission invite Member States to use in their collective budgetary surveillance process at European Union level (on the basis of the annual convergence programmes submitted by Member States). The specific criteria in question are those contained in the Commission Services Report, Public Finance in EMU — 2000, published last year. These were:

  • Member States must meet or make progress towards the medium-term budget target of "close to balance or in surplus";

  • reforms should take into account the cyclical position and must not be pro-cyclical;[24]

  • account must be taken of the level of Government debt and long-term budget sustainability; and

  • tax reductions should form part of a comprehensive reform package.

  15.10  The Commission claims that meeting these criteria would help to ensure that tax reforms have a sustained and positive impact on growth and employment.

  15.11  Without entering into the merits or otherwise of these particular criteria, we note that the Commission's approach appears to imply the need for Member States to adopt a more coherent and consistent approach in matters of taxation and macro-economic management of their economies. We also note the Minister's assurance that tax policies remain the responsibility of Member States. However, the thrust of the Commission's Communication does not fit well with the Government's stress on leaving Member States discretion to determine what combination of tax and spending reforms best suits their needs. This tension will need to be resolved in the Council-Commission report to the spring European Council. We are unclear by what mechanisms that report will be produced. We clear this document, but invite the Minister to report back to us after the ECOFIN discussion to let us know the main orientation of that debate and how the report for the European Council will now be taken forward.

24  A fiscal stance which amplifies the economic cycle by increasing the budget deficits in a period of economic upturn and vice versa. Back

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