CONTRIBUTION OF PUBLIC FINANCES TO GROWTH
The contribution of public finances to growth and employment: improving quality and sustainability.
|Deposited in Parliament:
||16 March 2001|
||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|
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
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
"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."
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.