Lisbon summit to sanction tighter EU budget surveillance

Date: 09/03/2000

By Tim Jones

GOVERNMENTS' national tax-and-spend priorities will come under fierce EU scrutiny for the first time under plans to be agreed by Union leaders at their summit in Lisbon later this month.

Under this ground-breaking new approach, finance ministers will be asked to put the "quality of public finances" under the microscope to judge how effective budgets are in generating jobs and putting Europe at the forefront of the information revolution.

In a draft paper prepared for the 23-24 March summit, the EU's powerful Economic and Financial Committee (EFC) calls for the Union to "assess the contribution of public finances to growth and employment, in particular whether adequate steps are being taken to reduce the fiscal pressure on labour [and] improve the employment-incentive effects of the tax and benefits systems".

The system for carrying out these assessments is expected to mirror the arrangements put in place at the Luxembourg jobs summit in 1997, under which governments exchange information about 'best practices' in employment policy and criticise and encourage each other's approaches. "It would be like a league table, showing which governments had gone the 'right way' about getting their spending under control," said a senior monetary official.

Although no governments will disagree with the aims of the new approach championed by Economics Commissioner Pedro Solbes, several will be on their guard against any further encroachment onto their fiscal sovereignty.

The growth and stability pact agreed by Union leaders in 1996 already binds members to keep their public finances "close to balance" in boom years and sets an upper limit of 3%-of-national-income on deficits. But it does not allow EU institutions to set budgetary priorities for national governments.

The EFC's paper nevertheless calls on ministers to consider the "reorientation of government spending towards a greater relative importance of expenditure in capital accumulation, both physical and human, and to support research and development, innovation and information and communication technologies", while taking into account member states' "specificities and responsibilities".

Solbes' aim, supported by the EFC, is to ensure that spending is allocated not just to classic investment in infrastructure and physical capital, but also to education, particularly in the new computing and wireless technologies which will be discussed at next week's summit.

Although European firms are world leaders in developing mobile phone technology, the Commission claims that the EU as a whole is falling behind the US and Japan in spending on fundamental research. The Union devotes 1.8% of gross domestic product to R&D, compared with 2.8% in the US and 3% in Japan, while researchers make up 2.5% of

the EU workforce against 6.7% in the US.

Yet government investment was often the first to be squeezed as countries prepared to join the euro zone in 1996-98, since it was less politically untouchable than pensions, welfare benefits, defence or health spending.

German public investment dropped by more than 10% between 1996 and 1998 while, in the UK, a fall of the same scale was registered in 1997 alone.

To prevent Socialist governments from using the call for higher capital expenditure as an argument for extra state spending overall, the EFC report warns that "tackling these questions must not jeopardise further progress towards balanced and sustainable fiscal positions".

Governments' national tax-and-spend priorities will come under fierce EU scrutiny for the first time under plans to be agreed by Union leaders at their summit in Lisbon, 23-24.3.00.