11. CO-ORDINATION OF BUDGETARY POLICIES
Commission Communication on strengthening co-ordination of budgetary policies.
|Document originated:||27 November 2002
|Deposited in Parliament:||3 December 2002
|Basis of consideration:||EM of 16 December 2002
|Previous Committee Report:||None
|To be discussed in Council:||European Council of 21 March 2003
|Committee's assessment:||Politically important
11.1 The European Council at Barcelona in June 2002 decided
existing EU fiscal policy co-ordination mechanisms need reinforcement
and asked the Commission to "present proposals to reinforce
economic policy co-ordination in time for the Spring European
11.2 This Communication is the Commission's response
to that request. The document outlines proposals to improve the
implementation of the Stability and Growth Pact (SGP). The proposals
aim to secure the core budgetary objectives of sound and sustainable
public finances and increase the contribution of public finances
to growth and employment in line with the Lisbon strategy for
11.3 The Commission says its premise is that sound public
finances are at the heart of Economic and Monetary Union (EMU)
and contribute to growth and employment, notably by contributing
to a stable macro-economic climate. The document describes the
rule-based framework for the co-ordination of budgetary policies,
which is based on the requirement for Member States to avoid excessive
deficits (general government deficits to be below 3% of GDP and
general government debt level below 60% of GDP). The Commission
notes that this requirement is complemented by the SGP, which
requires Member States to achieve and maintain budgetary positions
of 'close to balance or in surplus' (CTBOIS).
11.4 The Commission reviews budgetary performance since
1999. It notes the impressive achievement in the years leading
up to the launch of the euro. But it believes that since 1999
the improvement has ground to a halt and in some cases been reversed.
Although it refers to achievements, the Communication focuses
on recent examples where provisions of the SGP (including the
excessive deficit procedure and the early warning mechanism) have
had to be activated.
11.5 The Commission believes that the existing framework
remains appropriate and is essential for the smooth functioning
of EMU; that the SGP budgetary goal of CTBOIS remains an economically
valid objective; and that an approach that relies on peer pressure
together with firm political backing can generate results. But
in its view there are a number of difficulties with implementation
of the SGP by Member States, including:
- weakening of the political ownership of the SGP by Member
- difficulty in setting clear and verifiable budget objectives,
taking account of the effect of the economic cycle;
- difficulties in collection and assessment of budgetary statistics;
- failure of some Member States to run sound budgetary policies
in good times;
- ineffectiveness of the SGP's enforcement procedures;
- difficulty in developing the SGP into an effective co-ordination
- difficulty in communicating effectively on the benefits of
sound public finance and on how the SGP works.
11.6 To reinforce co-ordination of budgetary policies
in EMU, the Commission makes five proposals intended to improve
the interpretation of the SGP and to ensure a more rigorous adherence
to the objective of sound and sustainable public finances. The
document does not suggest changes to the existing legal framework
or the creation of new procedures, and so does not alter the requirement
to avoid excessive deficits and to have CTBOIS. The Commission's
- budgetary objectives that take account of the economic cycle;
- transitional arrangements for countries with underlying deficits
exceeding the CTBOIS requirement;
- avoiding pro-cyclical budget policies in good times;
- allowing some specified small deviations from the rules in
order to further the Lisbon Agenda objectives of promoting growth
and employment; and
- making sustainability of public finances a core policy objective.
11.7 The Commission proposes a four-point programme to
improve implementation of the SGP:
- Member States to reaffirm their political commitment to the
- upgrading analysis of economic and budgetary policies;
- more effective enforcement procedures within the existing
Treaty and SGP framework; and
- better communication through openness and transparency.
The Government's view
11.8 The Financial Secretary to the Treasury (Ruth Kelly)
"The UK supports a prudent interpretation of the Stability
and Growth Pact, which takes into account the economic cycle,
sustainability and the important role of public investment.
"A prudent interpretation of the Pact would provide a long-term
solution and strengthen fiscal discipline. This principled approach
will govern the UK's stance towards the Commission's proposals,
and in EU surveillance procedures.
"To the extent that the Commission's proposals could represent
a strengthening of the economic underpinnings of the Pact, the
Government sees them as a useful contribution to the debate on
the reform of the SGP.
"However, the Government remains very concerned about the
Commission's ideas for institutional change on the SGP, which
they are pursuing through the Convention on the Future of Europe,
which would increase the role of the Commission in enforcing the
disciplines of the Pact, at the expense of Member States."
11.9 This document is important in highlighting some
of the issues in relation to the development of the Stability
and Growth Pact and co-ordination of budgetary policies. It is
also revealing about the Commission's ambitions in this area
to which the Minister especially draws our attention. We note
with approval the Government's strong reservations in this regard.
We clear the document.