Dull document masks budgetary dynamite
By Economics Correspondent Sean Whelan A potential outbreak of revolution has been picked up on RTÉ’s early warning political radar system. On Friday the European Commission published a document with the reassuringly dull title “2014 draft budgetary plans of the Euro Area: overall assessment of the budgetary situation and prospects”. …And they wonder why this stuff doesn’t get on the TV very often. But stick with it, this one could be the start of something big. It’s not so much what the report says, but rather the very existence of the report that is the interesting thing, because this is the makings of an instrument for steering budget policy in Euro Area countries from Brussels. And, because it is outside the EU treaties, it’s a little bit revolutionary. If it’s taken to its logical conclusion, it’s politically explosive. There was a reason for Ireland moving its budget day from its traditional December slot back to mid-October. That reason is that all Euro Area countries are now obliged, under the so-called ‘two pack’, to submit draft budget plans by that date. If the country is not in a bailout programme (which narrows it down to thirteen for this exercise) they must submit their plan in a standardised format. This makes it possible for the first time to directly compare fiscal policy in all those states. It also makes it possible to merge them into an aggregate “Euro Area Budget” with a pretty high degree of accuracy. From this the Commission can see if aggregate fiscal policy is too loose or too tight, and can – in theory at least – suggest to countries that they might alter their budget plans for the greater good of the Euro area… Even if those country plans taken in isolation are fine and compliant with all the rules. And that is where the political dynamite is. But there is no sign of an explosion in this, the first report. Germany and Estonia get full marks, being completely compliant with stability and growth pact rules on debt and deficit. France Holland and Slovenia are also deemed compliant, but with no room for slippage, as this would put the correction of their excessive deficits at risk. Belgium, Austria and Slovakia are on track to correct their excessive deficits by the end of this year, but may slip off track for their fiscal compact medium term objectives (i.e. further deficit reduction). Five countries are at risk of non- compliance: Spain, Italy, Luxembourg, Malta and Finland; some for deficits, Italy for excessive debt (132% of GDP). For the Euro Area as a whole, public debt is expected to stabilise. The debt-GDP ratio should be 93% next year (120% in Ireland), with the aggregate deficit falling below the 3% limit next year (Ireland 4.8%). But only two countries (Estonia and Germany) have reached their fiscal treaty targets, so consolidation will have to continue for the rest. The aggregate fiscal effort for the Euro Area next year will amount to 0.25% of GDP. The Commission has a general criticism of the budget plans – they don’t pay enough attention to the composition of consolidation. In particular the general trend of saving money by cutting back on capital spending – which constrains growth – has not been reversed. Overall the plans of the 13 show a reduction in spending and a stabilisation of revenue, which has increased every year since 2010. It says spending reductions are rather small, including compensation of employees (-0.2% of GDP) social welfare, intermediate consumption and capital spending (-0.1% of GDP each). But it points out that spending on subsidies will be unchanged next year, while interest payments will rise by 0.1%. On the tax front the trend is for indirect taxation revenues to rise, while direct tax revenues are set to fall, due to decreasing revenues from capital taxes. Social security contributions are expected to remain the same. For the detailed criticisms you have to plough through each of the 13 individual country reports. But these are also a very useful source of budget data that, because they are in a standard form, are for the first time readily comparable. This is useful for all of us, not just those who want more centralised control of the euro area economies. Next year Ireland will join the group of countries submitting standardised budget forms each October. From an Irish point of view, that’s when it gets really interesting. Knowledge is power. You won’t see this on TV.