EU’s ‘big four’ get budget deficit warning

Date: 13/01/2000

By Tim Jones

GERMANY, France, Italy and the UK are all running the risk of violating the EU's strict fiscal rules in the event of an economic downturn, warns a new report from the Organisation for Economic Cooperation and Development.

The 29-member club of rich nations warns that the Union's 'big four' could all see their budget deficits widen to more than 3% of gross domestic product - the ceiling set by the EU's growth and stability pact - unless taxes are raised or spending programmes cut.

"More ambitious medium-term targets may be desirable if one considers additional factors such as the implications of population ageing on pension and healthcare costs," states the study.

The report's authors put together an economic model designed to capture the fiscal effects of the kinds of shocks which have occurred in Union countries over the past three decades. These varied from the 1979-80 oil price shock to the impact of German reunification in the early Nineties.

The OECD's findings will strengthen the European Central Bank's case as it tries to browbeat governments into balancing their budgets over the course of a typical three-to five-year economic growth cycle.

However, in its assessment of how much budgetary leeway EU governments have before they breach the 3%-of-GDP limit, the OECD concludes that most could afford to run multi-billion-euro 'structural deficits' with boom-time tax windfalls stripped out, over a shorter timescale. "For the majority of countries, if governments were to aim for a cyclically-adjusted budget deficit between 1.0% and 1.5% of GDP, the actual deficit would (with a 90% likelihood) remain within the 3% limit over a three-year horizon," it states.

But over five years, the risks for Germany, France and Italy of running a deficit of more than 1% of GDP increase. In the budget-cutting plans they submitted to the European Commission, all three forecast deficit-to-GDP ratios in 2002 of 1%.

The problem for the UK is even more pronounced, according to the OECD. London has forecast a structural 0.2%-of-GDP surplus for 2002 but, based on the historic volatility of the British government's financial position over the past 30 years, the report says this "might not provide a strong medium-term hedge against breaking the 3% limit".

Germany, France, Italy and the UK are all running the risk of violating the EU's strict fiscal rules in the event of an economic downturn, warns a new report from the Organisation for Economic Cooperation and Development (OECD).