Major challenges for quality of public finances ahead
Article created on 25 June 2008.
Communication COM(2008)387 final
"The role of quality of public finances in the EU governance framework"
The Communication finds that even though the budgetary situation improved markedly in 2007, there is no room for complacency on fiscal policies. A number of challenges are ahead which need to be tackled to ensure sustainability of public finances, fostering long-term economic growth and the smooth functioning of EMU.
Report on Public Finances in EMU
The analysis reveals that Member States have significant scope to enhance the quality of public finances. A comprehensive fiscal policy approach that raises the quality of public finances is called for. Policy action can be more growth-friendly and competitiveness-enhancing through measures that help raise the efficiency of expenditure and revenue systems.
• Sound overall public finances remain the linchpin of fiscal policy-making conducive to economic growth. High-debt countries have significantly lower medium-term growth and capital accumulation plays a less significant role for GDP growth due to crowding-out effects.
• When public administrations become too large they tend to hinder economic growth in particular if they are associated with high tax burdens on labour and capital and inefficient use of public resources.
• Whether certain types of public expenditure are growth-enhancing largely depends on their ability to address market failures and provide public goods.
• Revenue structures that limit distortions and disincentives are typically associated with higher growth.
• And finally, achieving results on all of the above fronts of QPF can be facilitated by strong fiscal governance frameworks.
To strengthen the focus on the quality of public finances in national budgetary policies, the Commission Communication today identified a number of areas for action which build on the 2005 SGP reform and the May 2008 Commission Communication on EMU@10.
These key areas for action are:
• More systematic and comprehensive reporting;
• Inclusion of performance information in budgetary procedures;
• Enhancing the efficiency of tax systems;
• Establishing a regular review of the quality of public finances.