NoL204/6 OfficialJournaloftheEuropeanCommunities 10.8.77
II
(Actswhosepublicationisnotobligatory)
COUNCIL
COUNCIL DECISION
of25July1977
onthepreparationofpublicbudgetsfor1978
(77/492/EEC)
THECOUNCILOFTHEEUROPEAN COMMUNITIES ,
HavingregardtotheTreatyestablishingtheEuropeanEconomicCommunity ,
HavingregardtoCouncilDecision74/120/EECof18February1974ontheattainment
ofahighdegreeofconvergenceoftheeconomicpoliciesoftheMemberStatesofthe
EuropeanEconomicCommunity (!),andinparticularArticles1and3thereof,
HavingregardtotheproposalfromtheCommission ,
WhereastheCouncilagreeswiththeanalysisoftheeconomicsituationcontainedinthe
Commissioncommunication of7July1977concerning,inparticular,thepreparationof
publicbudgetsfor1978,
HASADOPTED THISDECISION :
Article1
MemberStatesshallpursueeconomicpoliciescomplyingwiththeguidelinesontheprep­
arationofpublicbudgetsfor1978setoutintheAnnex.
Article2
ThisDecisionisaddressedtotheMemberStates.
DoneatBrussels,25July1977.
FortheCouncil
ThePresident
H.SIMONET
(')OJNoL63,5.3.1974,p.16.

10.8.77 OfficialJournaloftheEuropeanCommunities NoL204/7
ANNEX
GUIDELINES FORECONOMIC POLICYINTHECOMMUNITY
1.Generalguidelines
1.1.Asinsufficientprogresshasbeenmadewiththe
processofrationalization undertakenbythecoun­
triesoftheCommunity ,thegrowthandemploy­
mentobjectivesadoptedinthecontextofthe
economicpolicyguidelinesestablishedinMarch
1977andinthefourthmedium-term economic
policyprogramme (J)arehardlycapableof
achievementfortheCommunityasawhole.The
economicpoliciesconductedbytheMember
Stateshavinganexternalsurplusandthoseof
deficitMemberStateshavenotyetproducedall
oftheirexpectedresults.Theprocessofadjust­
mentwhichhasbegunandthestructural
changesbywhichitisinevitablyaccompanied
areoccurringslowlyandtheirmagnitudehasnot
yet,moreover,beenfullyappreciated .Neverthe­
less,impatienceisnomoreappropriatethan
resignationorpessimismwhenitrelatestothe
majordistortionswhichhaveemerged,overa
numberofyears,intheworldeconomyunder
theinfluence,notably,ofacceleratedinflation
andtheoilcrisis.Thesestructuraldifficultiescan
beovercomeonlygraduallybyputtinginto
actionthepoliciesforeseeninthefourth
medium-term economicpolicyprogrammeof
theCommunity .providedfor,indeed,intheguidelinesof
November1976andMarch1977foreconomic
policyintheCommunityin1977.
1.3.AlltheMemberStatesshouldtrytore-establish
orimproveconditionsconducivetoareturnto
sustainedandnon-inflationary growth,encou­
raging,inparticular,thepropensitytoinvestof
theprivatesectorandassuringanadequatelevel
ofpublicinvestment .Toachieveahealthyand
lastingrecoveryininvestment,thereductionin
therateofincreaseofwagecosts,bothdirectand
indirect,ofthelastfewmonthsneedsto
continue,butingeneralitmustbeaccompanied
bypoliciestoreduceinequalities .Atthesame
time,specificaction,bothatnationaland
Communitylevel,shouldbesuchastofavourthe
recoveryininvestmentinthecontextofa
Communitystructuralpolicy.TheCommunity
couldcontributetothisbystrengthening existing
Communityinstruments ,therebyincreasingthe
multipliereffect.Thus,forexample,anincrease
inthecapitaloftheEIBhasbeenenvisagedand
abetteruseofthemeansofactionoftheSocial
Fund,abroadeninganddiversification ofthe
activitiesoftheRegionalFundandamobiliza­
tionofincreasedfinancialresourcesinthe
energysectorcanallbeanticipated .Inaddition,
theCommissionhasproposedthatnewCommu­
nityborrowingmachinerybecreatedtofinance
investmentofastructuralcharacterinlinewith
priorityCommunityobjectivesintheareasof
energy,industriesundergoingstructuralchange
andinfrastructures .Thisproposaliscurrently
understudy.
1.4.Publicintervention isnotsufficienttoovercome
thedifficultiesofadaptationwhichwillarisein
comingyearsandtorestoreconfidenceinthe
medium-term outlook.
Aminimumeconomicandsocialconsensuson
objectivestobeachievedandtheinstrumentsto
beusedismorethanevernecessary.
Thethirdmeetingbetweenthesocialpartners,
theGovernments oftheMemberStatesandthe
Commissionon27June1977confirmedthe
scaleofthetaskstobecarriedoutandofthediffi­
cultiestobesolved.Themeasureswhichhave
alreadybeentakeninalltheMemberStatesin
connectionwithemploymentandprofessional
training,particularlythatofyoungpeopleand1.2.Itwouldthenbeamistaketoabandoneffortsto
controldemandandtocoordinateitatCommu­
nitylevelonthegroundsthat,uptothepresent,
theobjectivessoughthavenotalwaysbeenfully
attained.Thedisparityofeconomicsituations
withintheCommunityimplies,inordertomain­
tainanadequaterateofgrowthinthoseMember
Stateswheretheprimarypolicyobjectiveisto
removeinflationandtheexternaldeficit,that
expansionshouldcontinue,andprobablyaccel­
erate,inthosecountrieswherethebalanceof
paymentsiscurrentlysatisfactory .But,onthe
otherhand,expansioninthelattercountriesis
partlydependentuponthesuccessofanti-infla­
tionarypoliciesintheformer,sincethepersist­
enceofsizeabledivergencesintherateofprice
increasesislikelytocreatenewuncertainties
especiallyaboutthemedium-term development
ofexportmarketsandthereforetoinfluence
investor'sdecisions.Itismorethaneverrequired
thatadifferentiated regulationofdomestic
demand,asbetweenthesurpluscountriesand
thedeficitcountries,shouldbesustained,as
(MOJNoL101,25.4.1977,p.2.

NoL204/8 OfficialJournaloftheEuropeanCommunities 10.8.77
women,oughttobestrengthenedtothegreatest
extentpossible.Somestrengthening ofmeasurestakentostimu­
lateinvestmentisnecessaryinordertorecover
lostgroundasfarasmeetingmedium-term
targetsisconcernedandtoacceleratethereturn
tofullemployment .SomeMemberStateshave
alreadyadoptedthisapproach.
3.2.Asfarasprivateinvestmentisconcerned,deci­
sionsmightbemadewhereappropriate,for
example,to:
—enlargethepossibilitiesoffiscalevaluationof
companyliabilitiesandassets;
—increasesubsidiesforresearchanddevelop­
ment;
—payselectivesubsidiesfavouringinvestment
designedtocreatenewenergysourcesorto
saveenergy,toimprovetheenvironmentand
torefurbishregionalinfrastructures .
Inordertoharmonizesuchactionandtoavoid
creatingdistortionsbetweentheMemberStates,
allinvestment-incentive programmesshouldbe
thesubjectofcoordinationatCommunitylevel.2.Monetarypolicyguidelines
2.1.Monetarypolicyhasamajorcontributionto
makeinconsolidating orstrengthening the
successachievedinthefightagainstinflation.
Thepursuitofasteadymonetarypolicyandthe
publicationofquantifiedguidelinesfortherele­
vantmonetaryaggregatesineachMemberState
willhelptoreduceinflationaryexpectations ,to
strengthentheconfidenceofmanagementand
privateconsumersandfavourthedevelopmentof
amorestablepatternofexchangeratesbetween
thecurrenciesofMemberStates.Initsannual
reportontheeconomicsituationintheCommu­
nity(J)theCommission hasalreadyoutlined
quantitativeguidelinesformonetarypolicyinthe
MemberStatesfor1977,buttargetfigureswere
indicatedforsomeMemberStatesonly.
Accordingtothefourthmedium-term economic
policyprogrammefortheCommunity ,guide­
linesforinternalmonetarypolicyshouldbeesta­
blishedataCommunityleveleachyear.The
Commission willagainformulatequantitative
monetarypolicyguidelinesinitsforthcoming
annualreportontheeconomicsituationinthe
Community .Thequantitativeguidelineswill
havetotakeaccountoffairlydivergenteconomic
situationsandthedifferingmonetaryinstruments
oftheMemberStatesandtheextenttowhichthe
MemberStates'economiesareopentowards
foreigncountries.
2.2.Dataavailablefor1977(covering,formostcoun­
tries,onlythefirstquarter)appeartoindicatea
slowdecelerationofmonetarygrowth,butspecial
vigilanceisstillrequiredincertainMember
States,especiallyinItaly.InDenmark,France
andtheNetherlandsitwouldappearnecessaryto
maintainthemeasurestakentolimittheexpan­
sionofbankcredit.Ontheotherhand,inthe
UnitedKingdom,wheremonetarygrowthhas
fluctuatedwidelyinthepast,asteadierandmore
sustainedexpansionofthemoneysupplyseems
feasibleanddesirable.IntheFederalRepublicof
Germany,thetrendofcentralbankmoneywas
largelyconsistentwiththeguidelinesduringthe
firstfourmonthsof1977.3.3.Anincreaseindirectinvestmentbypublicauthor­
ities,whethercentralorlocal,isalsorecom­
mendedformostcountries,withinthelimitsof
non-inflationary financingpossibilities and
takingaccountoftheexistingstructureof
interestrates.Theimportanceandimpactofthis
increasewilldifferfromonecountrytoanother,
accordingtopublicinvestmentneedsandthe
degreeofsparecapacityexistingintheconstruc­
tionindustry.Specificprogrammestobedrawn
upshouldtakethisintoaccount.Incertain
MemberStatesthemainaimofsuchmeasures
wouldbetostrengthenoveralldemandtrends,
whileinothersthesemeasureswouldbeaimed
moreatimprovingtheeconomicandsocial
infrastructure .
Inordertoattaintheseobjectives,planning
shouldnowbegininmostMemberStatestoraise
thevolumeofgeneralgovernmentinvestment
abovethatofrecentyearswithout,however,
raisingtheproportionofpublicexpenditurein
GDP.Theannouncement oftheimplementation
ofnewprogrammescouldwellstrengthenconfi­
dencewithoutproducingundesirable'mechan­
ical'effectsif,asisthecaseincertaincountries,
unusedproductioncapacitiesarefairlysubstan­
tial.Integratingsucheffortsintothefive-year
publicinvestmentprogrammes ,coveredby3.Budgetaryandfinancialpolicyguidelines
3.1.Morethaninthepastbudgetarypolicyshould
nowbeusedasaninstrumentofgrowthpolicy.
(')OJNoL358,29.12.1976,p.1.

10.8.77 OfficialJournaloftheEuropeanCommunities NoL204/9
investmentandprivateconsumption .Accord­
ingly,importscouldbemoredynamicand,
despiteanappreciableperformanceofexports,
thecurrentbalanceshouldonlyimproveslightly.
Unemployment islikelytoincreasefurther.
Owingtothemoderationofimportpricesand
wagecoststheinflationratewillbecutconsider­
ably.
Giventhesizeoftheexternaldeficitandthe
growingexternaldebtburdenwhichreducesthe
authorities'roomformanoeuvre,economic
policyshould,asapriority,begearedtowards
creatinglastingconditionsforareturntoexternal
equilibriumwithoutwhichtheemploymentsitua­
tioncanonlygrowworse.CouncilDirective74/121/EECof18February
1974onstability,growthandfullemploymentin
theCommunity(*),shouldincreasethechances
ofachievingamorestablelong-termgrowth.
3.4.Actiontakentoreviveinvestmentusingthe
meansdescribedaboveimpliesaprolongationof
effortstoreducebudgetdeficitsinthesurplus
countries.Nevertheless ,stimulatoryactionshould
notbringabout,inthelongerterm,anylasting
deteriorationinthenetborrowingrequirement .
Wheretheweaknessofinvestment reflects
generalunder-utilization ofproductivecapacity
andentailstheriskofpersistentreductionor
obsolescenceofcapacity,adeteriorationinthe
budgetsurplusordeficitwouldbeacceptable.
Thefavourableeffectsthisshouldhaveon
economicgrowthshouldintimeengenderaddi­
tionaltaxrevenuewhichinitsturnshouldtend
toreversetheeffectonthebudgetdeficit.
ThoseMemberStateswhosebalanceofpayments
maystillbeprecariousin1978orwhorequirea
currentsurplusinordertorepayexternaldebt
shouldmodulateverycarefullythemeasures
takentostimulateinvestment,whichshouldnot,
inanyevent,bringaboutagrowthinbudgetdefi­
citsorofthemonetaryaggregatesinexcessof
thelimitsagreedwithintheCommunitycontext
orwiththeInternationalMonetaryFund.
Inthosecountrieswhosebudgetdeficitisbeing
financedtoasubstantialdegreebymonetary
meansin1977,actiontogetinvestmentmoving
againshouldbecarefullymonitoredtoprevent
thecreationofnewliquidityfromstrengthening
inflationaryexpectations .Theincomespolicyadoptedinthespringof
1977couldcontributetotheattainmentofthis
objectiveinsofarasthesalaryguidelines,which
implyamodestgrowthinrealtermsin1978,are
strictlyadheredto.Itshouldbeaccompaniedby
budgetmeasureswhich,rangedaroundapolicy
toreducethenetborrowingrequirementofthe
publicsector,couldneverthelesspermitcertain
investmentincentives.Thisdevelopmentwould
beevenmoredesirablesincethemaintenance of
thehighinterestrates,necessarytofinancethe
externaldeficit,couldhaveanegativeimpacton
thepropensitytoinvest.Ifthesalarynormswere
tobeexceeded,therestrictiveorientationof
budgetarypolicywouldhavetobereinforced;in
particularitwouldbeappropriatetohave
recoursetoanincreaseinindirecttaxationin
suchawayastomaintainprivateconsumption ,
andconsequentlyimports,atalevelcompatible
withthebalanceofpayments,whichmustbe
regardedastheprincipalobjective.
4.2.IntheFederalRepublicofGermany,the
upswing,whichhasbeenmorerestrainedthanin
previousexpansionaryphases,isnotsufficiently
strong.Takingintoaccounttherelativelackof
dynamismofeconomicactivity,intheareaof
private-sector investmentinparticular,growth
willbeinsufficienttoimprovethelabourmarket
situationsubstantially .4.Guidelinescountrybycountry
4.1.InDenmark,theeconomyhasenteredintoa
phaseofveryslowgrowthsincetheautumnof
1976broughtaboutbyarestrictivepolicymade
necessarybyadeterioration inthecurrent
balanceofpayments.Privateconsumption has
scarcelyrisenatallandtotalinvestment
(constructionandmachinery)hasexperienced a
quitemarkeddecline.Industrialexportsarethe
mainelementsupportingactivitywhichremains,
however,insufficienttopreventanincreasein
unemployment .Thesetrendsshouldpersistuntil
theendof1977and,asaresultofafallin
imports,shouldpermitareductioninthecurrent
deficit.
Theoutlookfor1978isforacertainpick-upof
theeconomyasaresultofamodestrecoveryofOwingtotheslowrateofgrowth,effortstocut
thepublicdeficitshouldbespreadoveralarger
periodthanforeseen.Theremayinfactbea
needforthepublicbudgetstoexertanexpan­
sionaryinfluenceontheeconomy.Theamended
taxbilltabledbytheGovernmentandnow
underexaminationbyParliamentisalongthese (•)OJNoL63,5.3.1974,p.19.

NoL204/10 OfficialJournaloftheEuropeanCommunities 10.8.77
intheformnowadoptedshowsadeficitofFF
11800million,couldclosewithadeficitsimilar
tothatof1976.However,thegreaterpartofthis
deficitwillbefinancedbynon-monetary means.
Inaddition,theauthoritieshaveforthefirsttime
fixedagoalformoneysupplygrowthfor1977
whilemaintainingcontrolovertheincreasein
thegreaterpartofbanklending.Compliance
withtheseguidelinesthroughoutthecurrentyear
willmakeavaluablecontributiontothegeneral
fightagainstpriceandcostinflation.lines.Underthebill,whilethestandardVATrate
istogoupfrom11%to12%andthereduced
rate—applyingprincipallytofoodstuffsand
services—from5-5%to6%,childbenefitsare
tobeincreased,certainbasicallowancesunder
incomeandwagetaxraisedandsomerelief
grantedinrespectofcorporationandwealthtax.
Thispackageislikelytoprovideaninitial
stimulusofsomeDM1000millionin1978.
Shouldtheimpactofthesemeasures,together
withthoseadoptedearlier(theannualsharesof
themultinannual publicinvestmentprogramme ,
themeasuresaidingpublichousingandthe
specificprogrammetomaintainemployment )is
inadequatetorestoredomesticdemand,new
stimulishouldbeapplied,particularlywitha
viewtothelong-termstrengthening ofthe
propensitytoinvest.
Despitethemoreexpansionarynatureofthe
overallbudget,continuedeffortsshouldbemade
tocurbthegrowthofcurrentexpenditure,
therebymakingroomforcapitalexpenditure .Theeffortstorestoreequilibriumshouldbecon­
tinuedin1978and,inparticular,themore
restrainedgrowthofcostsseenin1977should
continue.Economicpolicy,bothmonetaryand
budgetary,shouldaidinthisdirection.Ascare
shouldbetakentoavoidanysharpacceleration
inthegrowthofdemandasthiswouldbelikely
togenerateanexcessiveincreaseinimports,the
growthinStateexpenditureshouldthereforenot
beallowedtoexceedtheincreaseinoutputin
valuetermsthoughspendingshouldbetimedto
takeaccountoftheshort-termeconomicsitua­
tion.Thusinvestmentinbuildingandconstruc­
tion,whichhasalowimportcontentbutan
appreciableeffectonemployment,mightbe
steppeduptohelpsustainemployment .Butin
anyeventareturntobudgetequilibrium,which
shouldremainthelonger-termobjective,should
notnecessarilybesoughtin1978.Thankstotheirimprovedearnings,localauthori­
tiesshouldbeabletoincreasetheirinvestment
expenditure .
Onthemonetaryside,theBundesbankshould
continueitspresentpolicyofexpandingthe
moneysupplyinlinewithpotentialgrowthand
afurtherslackeningintherateofpriceincreases.
Monetarypolicyshouldcontinuetobeapplied
flexiblysoastoavoidtemporarystrainsonthe
moneyandcapitalmarkets.4.4.InIreland,developments inthesecondhalfof
1977shouldbereflectedinamarginallyhigher
growthrateduetoamoresustainedperformance
ofexports,privateconsumptionandinvestment,
resultinginasmalldecreaseinunemployment ,
whichwillstill,however,remainatanhistorically
highlevelattheendoftheyear.Consumer
priceswillmoderateandthebalanceofpayments
deficitwillcontinuetowidenbutataslower
pace.4.3.InFrance,wheretherateofgrowthofwagecosts
hassloweddownsincethebeginningoftheyear,
theeconomicactivity,whichismainly
export-led,willremainmoderatebetweennow
andtheendof1977.Theexternaldeficitwill
shrinkfurtherandthetermsoftradewillgoon
improving .Theupwardmovementofpriceswill
tendtoslackengraduallyfromthesecondhalfof
1977.In1978,aprogressiverevivalofdomestic
demandshouldleadtosomequickeninginthe
rateofgrowth.Evenso,thesituationofthe
labourmarketwillexperienceonlyaslow
improvement .In1978thesetrendsshouldcontinue,unemploy­
mentshouldfallagainmoderatelyandtherateof
increaseinpricesslowdownfurther.
The1977budgetislikelytohaveamorestimula­
toryeffectthaninitiallyexpected.Thenet
borrowingrequirementasapercentageofgross
domesticproductshouldneverthelessbeofthe
sameorderofmagnitudeaslastyear(11-5%).
Thebudgetfor1978shouldbepreparedinaccor­
dancewiththeCouncilDecisionof15March
1976layingdowntheeconomicpolicycondi­Theeconomicpolicylaiddownfor1977is
aimedatsecuringadecisiveslowdowninthe
inflationratesoastomakesubstantialprogress
towardsrestoringequilibriuminthemainmacro­
economicrelationships .TheStatebudget,which

10.8.77 OfficialJournaloftheEuropeanCommunities NoL204/11
tionstobeobservedbyIreland(*)inconnection
withtheCommunityloan,andtakingaccountof
theprogressmadein1976and1977inreducing
theborrowingrequirement .
Attentionmustaccordinglybepaidtotheneces­
sityofnotincreasingtaxpressureonwage
incomes,duetoincomespolicyconsiderations ,
andofmakinganadditionalbudgetaryeffortin
favourofinvestmentandemployment .Itwould
bedesirableifanattemptcouldbemadetomake
savingsinnon-prioritycurrentexpenditureand
toenlargethetaxbaseoncertainincomes,
notablyagriculturalincomes.Inaddition,the
costoffoodsubsidiesalsoconstitutesaburdento
theExchequerandtheirphasingoutcouldbe
envisagedwhentheconsumerpriceindexshows
adeceleration .aresultofanincrease—alreadyimplemented
—incertaintaxratesandtheintroduction ofa
newsystemofadvancetaxonnon-wageincomes.
However,additionalmeasureswillprobablyprove
necessarytocomplywiththelimitofLit
16450000millionlaiddownbytheCouncilin
May.Furthereffortswillalsohavetobemadeto
keeptothelimitofLit14450000millionfor
1978.Thisisbecauserevenuegrowthmustbe
expectedtodeceleratesharplynowthattaxarran­
gementsarerevertingtonormalandincomesin
moneytermsexpandingalotlessrapidly.
Consequently ,thegrowthinpublicexpenditure ,
andmoreparticularlythatincurrentexpenditure ,
shouldbekeptwithinstrictlimits,leavingno
roomforanyincreaseinrealterms.Therewill
alsobeaneedtosecureadditionalrevenue,
amongotherthingsthroughafurtheradjustment
ofpublicservicechargesandanincreaseoflocal
taxes.Thereformofthesystemoffinancing
socialsecuritybenefitswhichtheGovernment
hasundertakentocarryoutby31January1978
shouldresultinabetterdistribution ofthetax
burdenonvarioustypesofeconomictransaction .
Itshouldalsoprovideanopportunityforstep­
pingupthefightagainsttaxavoidance.
Domesticcreditexpansionwasmuchlarger
duringthefirstquarterof1977thanhadbeen
estimatedinAprilforthisperiod;thiswasdue
totherepaymentofexternaltradedebts
followingtheabolitionofthebankers'deposit
andthetaxoncurrencypurchases.TheCommu­
nityandinternationalundertakingsgivenonthis
scorefor1977and1978mustbestrictly
compliedwithbythemonetaryauthorities,
failingwhichthestabilizationprogrammewould
beliabletolosemostofitseffectiveness .Ifneces­
sary,theceilingcontrolsonbanklendingwill
havetobetightenedandextendedoncemore.
Interestratesshouldbekeptrelativelyhigh,
whilesimultaneously endeavouring toimprove
theirstructure .Asfarasincomespolicyisconcerned,acontinua­
tionofamoderatepayagreementfor1978is
imperativeasitwillimprovetheprospectsfor
thedevelopmentofemploymentandreducethe
risktothebalanceofpaymentsoftoorapidan
expansioninprivateconsumption .
Toobtainatthesametimeamoderateexpansion
ofmonetaryaggregatesandasatisfactoryperfor­
manceofbanklendingtotheprivatesector,the
authoritiesshouldendeavourtofinanceasmuch
aspossibleofthepublicdeficitbynon-monetary
meansandencouragethedevelopment ofthe
'non-monetary liabilities'ofthebankingsystem.
4.5.InItaly,industrialproduction,particularly
becauseofthestabilizationmeasuresadoptedin
theautumnof1976,weakenedinthefirst
monthsoftheyear.Thecontinuedhighrateof
inflationslackened,thoughonlylittle.Atthe
sametime,thedeficitontheoverallbalanceof
paymentsforthefirstfourmonthsoftheyear
wasslightlysmallerthanayearearlier.Thelira
exchangerateremainedfairlystablethankstoa
substantialincreaseinthecommercial banks'
short-termexternalindebtedness ,andtoarapid
improvement inMayandJuneinthebalanceof
paymentsonasettlementsbasis.Theauthorities
shouldensurethateconomicgrowth,which
mightreach3%in1977,isobtainedunder
conditionswhicharecompatiblewiththeobjec­
tivesfor1977and1978agreedamongtheterms
forthegrantoftheCommunityloan.
Inthepublicfinancefield,thepublicsector
deficitwillshrinksignificantlyin1977,mainlyasLastly,fresheffortswillhavetobemadeto
containtheriseinlabourcostsperunitof
output.Successinthisfieldwillhelptoslow
downinflation,toimprovethecompetitiveposi­
tionoftheItalianeconomyandtosupportthe
levelofemployment .
4.6.IntheNetherlands ,followingsluggishgrowth
andanincreaseinunemployment inthefirst
half-year,theeconomyshouldpickupsomewhat
inthesecondhalfof1977andin1978,although (')OJNoL77,24.3.1976,p.15.

NoL204/12 OfficialJournaloftheEuropeanCommunities 10.8.77
thisisunlikelytoproduceariseinemployment .
Thebalanceofcurrentpaymentssurplusmay
wellremainatthesamelevel,ifnotincrease.
Theauthoritiesshouldcontinueapolicyaimed
atmedium-term targetsofreducingunemploy­
mentbymeansofstimulatingprivateinvest­
ments,theriseincostsandpricesandrestraining
thegrowthofthepublicsectorandofthecollec­
tiveburdeninrelationtoGNP.Short-term
problemsmustbeconsideredwithinthismedi­
um-termframework .allowedbythebudget,byabolishingVATon
investmentsandmakingfulluseofthescope
offeredbytheexistinglawsoneconomicexpan­
sion.Careshouldbetakentoavoidanadditional
increaseinpublicinvestment,giventhenarrow
marginofsparecapacityinthepublicworks
sector.Thereshouldbeagradualshiftinthe
publicinvestmentprogrammestowardsactivities
whichfocusmoreonthequalityoflife;thisshift
wouldalsocontributetotherequiredmoderation
inthegrowthofcurrentexpenditure ,whichis
essentialifarapidincreaseinthetaxburdenis
tobeavoided.Thegovernmentbudgetfor1978
shouldthereforebeaimedataredeployment of
thepresentbudgetaryresourceswithaviewto
holdingtoborrowingrequirementasapercen­
tageofGDPtothelevelreachedin1977.Sincetheoutlookforemploymentandactivityin
1978isnotparticularlyfavourable,itwouldbe
inappropriate togivebudgetpolicyarestrictive
bias.However,giventhemedium-term objectives,
thegeneralgovernmentborrowingrequirement
asaproportionofgrossdomesticproductshould
remainclosetothelevelreachedin1977.Inviewoftheresourcesavailableonthecapital
market,thegreatestpossibleproportionofthe
budgetdeficitshouldbefinancedthroughlong-
termloansonthenationalmarket.Monetary
policyshouldrestricttherateofgrowthofprivate
sectorshort-termcredittotheexpectedrateof
growthinthegrossdomesticproductinmoney
termssoastoreducethedangerofexcess
liquiditycausinginflationarytendenciestoget
outofhand.Sinceunemployment cannotbereducedunless
thereisarelativelylargeexternalsurplus,
economicpolicymustcontinuetoprovideroom
forsubstantialexportsoflong-termcapital,
which—giventhepresentoutlook—should
hardlybeanimpedimenttomeetingthegeneral
governmentfinancingrequirements .Inanycase,
thereisaspecialneedtocheckthegrowthof
domesticliquiditysoastoavoidanyincreasein
theratiobetweendomesticliquidityandnational
income.4.8.InLuxembourg ,theeconomicsituationisstill
sluggishandtheoutlookforthesecondhalfof
1977andfor1978holdsoutonlylittlehopeofa
revivalinactivity.Evensothepublicfinancesitu­
ationismorefavourablethanexpected.
InpreparingtheGovernmentbudgetfor1978,
accounthadtobetakenoftheimbalances
affectingtheemploymentmarket.Inorderto
countertheseimbalances andtostimulate
economicgrowth,theGovernmentadopted,in
conjunctionwithbothsidesofindustry,aplanto
maintaineconomicgrowthandfullemployment .
Suchapolicystanceiscompatiblewithmainte­
nanceofgovernmentnetlendingatalevelof
overFlux2000millionandholdinggeneral
governmentnetborrowing,expressedasapropor­
tionofGDP,tothesamelevelasin1977(1%).4.7.InBelgium,inthefirsthalfof1977,unemploy­
ment,particularlyamongwomen,roseonce
again,theupwardmovementofconsumerprices
sloweddownandforeigntraderemainedinsatis­
factorybalance.Inthemonthsaheadandin
1978theoveralleconomicgrowthwillprobably
stillbetoomoderatetoproduceanysignificant
improvementonthelabourmarket.Ontheother
hand,progressmadeinslowingdowntheratesof
inflationremainprecarious .Economicpolicy
shouldthereforecontinuetocombatbothunem­
ploymentandinflation,withinthelimitssetby
thedifficultpublicfinancesituation.
Theconstraintsimposedbythepronounced
publicfinancedisequilibrium —adisequili­
briumwhichisuntenableinthemediumterm
—wouldleavenoroomforimplementing an
economicpolicydesignedtostimulateactivity
andemployment throughoverallbudgetary
measures .TheGovernment shouldtherefore
pursueaselectiveandtemporarypolicyof
combatingunemployment ;itshouldstimulate
businessinvestment ,notably,whereinsofaras4.9.ThepresentoutlookfortheUnitedKingdom
economyissensitivetothewiderangeof
possibleoutturnsforearningsafterstageII
expiresattheendofJuly1977.Untilthedetails
ofthenextwageagreementareknown,itmust
befearedthataverageearningscouldwellaccel­
eratebeyondtheGovernment'stargetofabout
10%forthetwelvemonthsfromAugust1977.
Ifthishappens,atemporaryaccelerationin

10.8.77 OfficialJournaloftheEuropeanCommunities NoL204/13
demandisforeseen.However,bylate1978
economicgrowthwillhaveweakenedandinfla­
tionmayaccelerate.
Theforecastisforanincreaseingrossdomestic
product(GDP)ofabout3%from1977to1978.
Asmuchas1%ofthisgrowthinGDPwillbe
accountedforbyincreasedproductionofNorth
Seaoil.Therateofinflationisexpectedtofall
markedlyintheoutlookperiod;inthefinal
quarterof1978,however,theincreaseoverayear
earliermaystillbemorethan10%ifthe
Government'stargetwithrespecttoearningsis
exceeded.Thecombinedeffectofthisslowdown
inpricesandaccelerationinearningscouldbea
strongrevivalofprivateconsumption .Totalgross
fixedassetformationwillalsoshowanincrease
from1977to1978,albeitatalowerratethanfor
privateconsumption .Stronggrowthinprivate
sectorfixedassetformation(especiallyinmanu­
facturingindustry)willbepartlyoffsetbya
furthersubstantialdeclineinpublicsectorinvest­
ment.Thereislikelytobelittlechangeinpublic
authorities'currentconsumption .Ontheexternal
side,thereshouldbeacontinuedandrapid
expansioninnetexports,becauseofthecontribu­
tionofNorthSeaoil,pointingtoacurrent
accountsurplusofover£1000millionin1978.
Thepresentdevelopments ofthebudgetaryaggre­
gatessuggestthatthepublicsectorborrowing
requirement (PSBR)for1978/79shouldremain
withinthefigureindicatedintheLetterofIntenttotheIMFwithoutincreasingthetaxpressure
significantly .However,domesticcreditexpansion
(DCE)islikelytobeclosetothepermitted
ceiling.
Ifthegrowthinaverageearningsexceedsthe
Government'stargetsthentheproblemsfacing
theUnitedKingdomGovernment,whenconsid­
eringbudgetarypolicyfor1978/79,willbethat:
—afterreachingalowpointinthesecondhalf
of1978,therateofinflationmaybeginto
riseoncemore;
—therateofeconomicgrowthmaynotbesuffi­
cienttoavoidafallincapacityutilizationand
afurtherriseinunemployment ;
—thebalanceofdemandbetweenconsumption
andinvestmentmaydeteriorate;
—pressurescouldwellarisetousetheroomfor
manoeuvreprovidedbytheprojectedbalance
ofpaymentssurplustostimulateprivate
consumption .
Despitethestrongpossibilitythateconomic
expansionmayslowdown,nofiscalormonetary
relaxationcanbecountenanced giventhethreat
posedtotheUKeconomybythepossibilityofa
furthersurgeininflation.However,shouldthe
authoritiesstillseeroomformanoeuvrewithout
exceedingthetargetgiventotheIMF(aPSBRof
£8600milliontheequivalentof5-5%ofGDP),
actionshouldbedirectedtowardsalasting
increaseininvestmentandemploymentanda
progressivereductionintheinflationrate.