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Public finances – an unfinished reform agenda - 25/06/2008

A hand getting one euro coin from a purse

Budgets in EU countries in much better shape but further action required for healthier public finances

There is no room for complacency on public finances in the EU. Despite marked improvements in budget balances in 2007, governments should act now to ensure sustainable finances, long-term economic growth and the smooth functioning of the euro. That is the basic message in the new Commission paper on public finances.

EU governments have significant scope for action. The 2008 Commission report on public finances calls for a holistic approach to fiscal policy – especially more efficient taxing and spending – to promote growth and competitiveness.

Key points

  • Sound public finances are essential. Countries with a high national debt have significantly lower medium-term growth, as greater government borrowing raises interest rates and discourages private investment.
  • Large public administrations can hinder growth through high tax burdens and inefficient use of public resources.
  • Public funds should be best targeted on areas where the market does not function effectively and providing public goods (healthcare, education, etc.)
  • Higher growth is more likely when governments design  taxes in a way that avoids discouraging investment and encourages employment.


Building on the 2005 reform of the Stability and Growth Pact and the recent analysis reviewing ten years of the euro, the report also put forward some ideas for maintaining the focus on healthy public finances in national budget policies:

  • more systematic and comprehensive reporting
  • use of performance information in budget decision-making
  • more efficient tax systems
  • regular review of public finances

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