12 May Ecofin

Date: 15/05/1997

FINANCE ministers gave their blessing to the plans of the Spanish and Portuguese governments to 'converge' their macroeconomic performance with that of the most accomplished countries in the EU.

MINISTERS welcomed Spain's “two-handed strategy of the programme of promoting growth and employment on a permanent basis through budgetary consolidation and structural reform”. They also accepted that the economic assumptions upon which Madrid's plan to reduce the budget deficit as a percentage of gross domestic product was based were “realistic”. But despite the praise, ministers sounded a few cautious notes. Firstly, they warned the Spanish government not to rely too much on faster economic growth and falling interest payments to cut the deficit. Secondly, they said health-care spending needed to be rationalised and loss-making state-owned firms restructured. Thirdly, they stressed many measures already announced to deal with 'structural' spending problems should be implemented soon.

FOR Portugal, ministers were equally supportive. They “considered the policies presented in the programme to be appropriate to assist the Portuguese economy in accomplishing rapid modernisation and structural change”. But they issued the same warning to Lisbon as that given to Madrid - that falling interest payments could not be relied upon to reduce the deficit and real spending cuts were needed. “Sufficient safety margins should be built in to avoid an overshooting of the budgetary targets of the programme and ... periods of economic slow-down present a serious risk in this respect for Portugal.”

AT HIS first meeting since becoming the UK's new finance minister, Gordon Brown held bilateral meetings with European Commission President Jacques Santer and Internal Market Commissioner Mario Monti. They discussed general single market issues, but also the new UK government's plans to reduce the rate of value added tax charged on domestic fuel consumption from 8&percent; to 5&percent;. In a statement following the bilateral meeting, Monti said the move was contrary to the “spirit” of the VAT directive of 1992 which laid down that member states should work to bring their lower rates up to their standard levels. But he added: “Although the Commission's legal analysis can only be completed once the full details are known, I do not see any particular legal obstacle at this stage.”

MINISTERS carried out the final stage of this year's 'excessive deficit procedure', under which member states are censured for failing to get their budget deficits below 3&percent; of GDP or their public debt down and heading towards 60&percent; of GDP. This year, they agreed that five member states should be excused from censure for management of their public finances. The five included three virtuous states from last year - Luxembourg, Ireland and Denmark - along with two new countries, Finland and the Netherlands.

RECOMMENDATIONS for getting public finances under control were made to each of the censured member states. Two of these were published: one for Belgium and one for Italy. The Italian recommendations were the most closely scrutinised.

In their statement, ministers found “insufficient control of general government expenditure which, net of interest payments, increased well above the nominal rate of growth of the economy” in 1996. They called on Rome to “pursue its budgetary objectives for 1997 with determination and to monitor carefully the execution of the budget”. They also stressed that further efforts needed to be made to keep the 1998 deficit from rising above the 3&percent; targeted for this year.

MINISTERS held preparatory discussions on a revised plan to raise and extend minimum excise duties on energy products, on the basis of a document from the Dutch presidency after discussions on the plan by a high-level working group. “We have provided a method of working which maximises chances of progress in this area,” said Dutch Finance Minister Gerrit Zalm. The new proposal suggests raising minimum excise duties on motor fuel and extending those duties to electricity, coal and natural gas. Zalm said a political debate would have to be held over several key issues: how high the minimum rates should be, which products should be affected and the interaction between taxation and environmental policies.

BUDGET Commissioner Erkki Liikanen presented his draft budget for the Union for 1998. This suggested that commitment appropriations should grow by 2.4&percent; while payments should rise by less than the 2.9&percent; growth achieved in the 1997 budget. The use of own resources would be capped at 1.15&percent; of EU gross national product, leaving a margin of 5.8 billion ecu below the ceiling set in 1992. Zalm reported that a large number of finance ministers responded by suggesting that the budget should be even tighter than Liikanen had proposed, with some advocating a freeze in payments.

MONTI presented his action plan for the single market to ministers. This set a list of priorities for filling the gaps in the internal market, establishing dates for completing each sector with an overall deadline of January 1999 to coincide with the advent of the single currency. Ministers formally welcomed the plan, which will now be presented to internal market ministers next week before a revised draft is adopted by the Commission at the end of the month and presented to the Amsterdam summit in mid-June.