Select Committee on European Scrutiny Tenth Report


CONTRIBUTION OF PUBLIC FINANCES TO GROWTH AND EMPLOYMENT

(22222)
6997/01

The contribution of public finances to growth and employment: improving quality and sustainability.
Legal base:
Deposited in Parliament: 16 March 2001
Department: HM Treasury
Basis of consideration: Minister's letter of 1 March and EM of 19 March 2001
Previous Committee Report: None; but see (21961) —: HC 28-iii (2000-01), paragraph 15 (17 January 2001)
Discussed in Council: 23-24 March 2001
Committee's assessment: Politically important
Committee's decision: Cleared

Background

  15.1  This Joint Commission-Council document is the response to a request from the Lisbon European Council of 23-24 March 2000 for a report assessing the contribution of public finances to growth and employment, to be presented to the Spring 2001 European Council. The report is based on the Commission Communication on the quality and sustainability of public finances, which we reported on, and cleared, on 17 January 2001. However, in clearing the document, we commented that:

"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".

  15.2  In her letter to us of 1 March, the Economic Secretary to the Treasury (Miss Melanie Johnson) says:

"You noted that this tension will need to be resolved. In response to the first draft of the joint report circulated to Member States on 15 February the Government proposed a number of changes. These changes recognise the importance of sound and sustainable public finances, while allowing for an even-handed approach to policy choices open to Member States based on their individual circumstances, including the need for 'future-orientated' spending, that arise from a firm and disciplined approach to fiscal policy."

  15.3  In her Explanatory Memorandum of 19 March 2001, the Minister states that:

"While recognising that the appropriate balance will depend on local circumstances and the priorities of Member States, the Report examines whether adequate concrete measures are being taken in order to: 1) sustain sound public finances, paying attention to the importance of striking the right balance between paying back debt, targeted tax reform, strengthening public investment and preparing for the impact of ageing populations, 2) alleviate the tax pressure on labour, particularly the unskilled and low-paid, by improving the employment and training incentive effects of tax and benefit systems, and 3) redirect public expenditure towards increasing the relative importance of capital accumulation — both human and physical — and support research and development, innovation and information technologies."

  15.4  The Minister describes the various sections of the report as follows:

"The first section of the Report sets out the background and aims to ensure that all policy measures to achieve the Lisbon objectives — '¼to become the most competitive and dynamic based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion' — are mutually reinforcing.

"The second section of the Report sets out three main channels through which public finances can enhance potential growth and employment: 1) the accumulation of productive factors, 2) providing the right incentives through tax and benefit systems, and 3) providing a stable macroeconomic climate. Each is examined in turn, with recent progress made by Member States being summarised and the future challenges facing Member States being outlined.

"The third section discusses the need to maintain sound public finances, particularly to address new budgetary challenges, which are analysed over three different time horizons. Firstly, in the short-term, the report stresses the need to maintain a sustainable fiscal position and avoid repeating past policy mistakes when fiscal policy was loosened inappropriately. Secondly, in the medium-term, the Report emphasises the need to take fiscal policy choices on reducing debt, targeted tax reform and increasing public investment in order to best promote growth and employment. And thirdly, over the long-term, the importance of ensuring the sustainability of public finances in light of ageing populations is emphasised.

"The fourth section concentrates on moving towards more employment-friendly tax and benefit systems in order to reduce the fiscal burden on labour; some progress has been made by lowering the fiscal burden on labour as well as reducing marginal tax rates. Overall taxation on labour varies across Europe and remains high by international standards in many Member States. Recently there has been a tendency to tighten benefit entitlement conditions, thereby supporting participation in active labour market programmes. This section suggests that these processes should be accelerated.

"The fifth section assesses the contribution of public finances to a knowledge-driven economy. Through a framework of sound fiscal policies, the paper suggests that Governments must put more emphasis on education and training, while encouraging the private sector to increase innovation and R&D activities. This will enable European citizens, through enhanced market mechanisms and adequate incentive systems, to accumulate greater physical and human capital."

The Government's view

  15.5  The Minister says:

"The Report is non-binding on Member States. The Government welcomes the emphasis in the Report on fiscal discipline, including the importance of cyclically-adjusted fiscal balances and the need to promote long-term sustainability to protect public finances against the consequences of ageing populations.

"The Report makes clear, within a framework of sound public finances, it is for Member States to determine, in the light of local circumstances and national priorities, what combination of fiscal consolidation, targeted tax reform and increased public investment will best promote growth and employment. The Government welcomes the further analysis the Report proposes in this area. Tax policy remains the responsibility of Member States."

Conclusion

  15.6  The report has been endorsed by ECOFIN and will form part of ECOFIN's contribution to the Stockholm European Council on 23-24 March 2001. We note the Minister's observations that it is for Member States to determine what combination of budgetary balance, targeted tax reform and increased public investment will best promote economic growth and employment. We also note that tax policy remains the responsibility of Member States. Although we think it right to draw the document to the attention of the House, we are content to clear it.


 
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Prepared 6 April 2001