Select Committee on European Scrutiny Sixth Report


11. CO-ORDINATION OF BUDGETARY POLICIES


(24040)

14997/02

COM(02) 668


Commission Communication on strengthening co-ordination of budgetary policies.

Legal base:
Document originated:27 November 2002
Deposited in Parliament:3 December 2002
Department:HM Treasury
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
Committee's decision:Cleared


Background

  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 Council."

The document

  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 Europe's economy.

  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 States;

  • 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 framework; and

  • 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 proposals are:

  • 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 SGP;

  • 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) tells us:

"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."

Conclusion

  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.


 
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