Generali Group

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          23 September 2019 - 18:00

          EU fiscal policies: the long road to integration

          A lack of harmony between countries, despite many attempts of fiscal and tax coordination

          What exactly does it mean when we talk about public accounts? And what does the “public expenditure” of a country comprise? The main revenue of public administrations in EU countries is made up of taxes and social security contributions, the sale of assets, and capital gains.

          The main expenditure items are for public sector employees, goods and services purchased by public administrations, interest on public debt, and gross fixed capital formation.

          The European regulation provided for by the Stability and Growth Pact (an agreement among EU member states to control budgetary policies, which came into force on 01 January 1999) sets two parameters: a. a deficit (forecast or actual) of no more than 3% of GDP, and b. a debt/GDP ratio of no more than 60%. This pact was drawn up to ensure the substantial synchronisation of EU economic development (specifically with regard to the 19 countries in the euro area) and to avoid individual countries adopting measures that give an unfair advantage to their economies to the detriment of those of other member states.

          In 2017, the public deficit (calculated as revenue minus expenditure for the year) was -1.0% in the 28 EU member states and -0.9% in the euro area. In that year, 12 member states registered a surplus, including Sweden and Germany (+1.3%) and the Netherlands (+1.1%).

          The debt/GDP ratio in 2017 was on average 81% in the EU and 86.7% in the euro area, with 15 member states having a debt/GDP ratio higher than that set out in the stability pact: Greece (178.6%), Italy (131.8%), Portugal (125.7%), Belgium (103.1%) and Spain (98.3%).

          Public revenue was 44.9% of GDP in 2017 in the EU, with public expenditure of 45.8%. In the euro area, these values were 47.1% and 46.2% of GDP, respectively. Overall, however, public expenditure for all member states, which grew to 50.7% in the initial years following the 2007-2008 financial crisis, fell up to 2017, with revenues that, even in the euro area, grew at a higher rate than expenditure with a resulting contraction of the overall EU deficit. However, it should be pointed out straight away that the levels of revenue and expenditure vary significantly from one member state to another.

          In actual fact, revenue mainly comprises taxes and social security contributions. In 2017, the first represented 58.9% in the EU and 56.6% in the euro area. The second accounted for 29.75% in the EU and 33.1% in the euro area. In reality, the tax-contribution mix varies substantially between the different countries: taxes represented 50% in Slovakia and the Czech Republic, but 87.6% in Denmark and 81.5% in Sweden, while contributions accounted for over 37% in Germany, Lithuania, the Czech Republic and Slovakia, and only 1.75 in Denmark. 

          Public expenditure in 2017 was made up first of all by social transfers (social benefits and social transfers in kind) with a value of over 45% (and almost 48% in countries in the euro area), while labour income in public administration was 21.7% (around 21% in the euro area).

          Analysis of public finance in terms of “incoming” and “outgoing” highlights one of the most critical aspects of the Union, that is the degree of cohesion and integration on a fiscal policy level, which up to now has presented numerous difficulties that have led to a lack of common policies of harmonisation and coordination. Since the establishment of the EU, and even before that with the European Community, there have been various attempts to harmonise fiscal policy, even though there have been no significant results achieved to date.

          Indeed, all European governments adopt fiscal policies that reflect their needs and their “world vision” in relation to two key aspects: social policies of differing extents which taxes are intended to support and the ability to attract business investments - especially multinationals - offering them tax incentives. In terms of the former aspect, there is a clear difference between Scandinavian countries and the United Kingdom, whereas, on the other hand, the examples of Ireland or Luxembourg are well known, where the tax regimes are particularly favourable to companies (including large multinationals such as Google, Amazon, etc.) who invest in these countries.

          This behaviour is a real obstacle to the strengthening of the integration process on a European level and in the long-term risks giving rise, directly or indirectly, to considerable differences in the economic and social (and therefore political) situation of the various member states. In particular, this could result in the gradual divergence between “rich” and “poor” member states, giving rise to potentially unstable situations and conflicts: for this reason, the Union has tried to react through attempts at partial fiscal harmonisation in both the areas of direct and indirect taxation. One attempt at a common EU fiscal policy regarding direct taxation is known as CCCTB (Common Consolidate Corporate Tax Base), aimed at establishing a common taxable base for all member countries in relation to multinational companies. Another example is HST (Home State Taxation), aimed at defining a common pilot scheme for direct taxation. However, to date, as well as there not yet being a common European model in place for direct taxation, nor are there reciprocal tax codes and regulations, either direct or indirect. If the new Commission, which will be formed this autumn following the results of the elections in May 2019, is not able to set up some form of effective fiscal coordination between member states, the integration process risks being left behind.