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COM (83) 423 
 
 
 
Vol. 1983/0 158 
  
 
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In Übereinstimmung mit der Verordnung (EWG, Euratom) Nr. 354/83 des Rates vom  1. 
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COMMISSION  OF THE  EUROPEAN  COMMUNITIES 
COM(83) 423 final 
Brussels,  1st July 1983 
FISCAL POLICY IN THE MEMBER  STATES  IN 1984 
(Commission communication  to the  Council 
with reference  to article 3 of the  decision 
concerning  convergence  of 18 February  1974) 
COM(83) 423 final 

1^ 
FOREWORD 
The Commission  is transmitting  this communication  to the  Council  in 
connection with  the examination  of the  economic  situation  in the  Community 
scheduled  for 11  July (1), which  involves/  inter  alia,  setting 
quantitative  guidelines  for public budgets  in 1984. It is  also submitting, 
for information,  a report on the  follow-up  to the  guidelines  laid down 
in its communication  to the  Council  of the 1  July 1982 on  budget 
discipline  and economic convergence,  the second  part of which deals 
in particular  with restructuring public expenditure  towards  productive 
The first chapter  of this communication  presents  the economic 
outlook for the  remainder  of 1983 and for 1984, and  identifies  the main 
economic  policy  problems  the Community  will be facing  over the period. 
The second  chapter outlines  the budget  policy  most appropriate  in the 
present  situation. 
(1) Pursuant  to Article  3 of Council Decision  74/120/EEC  on the  attain­
ment of a high degree  of convergence  of the  economic  policies  of the 
Member States of the  European Economic  Community. 

- 1 -
I. The  macro-economic  situation  of the  Community  and forecasts  for 1983-84 
As the Commission  pointed out in its communication to the  European 
Council  of 9 June 1983 (1), there has  been,  since the last quarter of 
1982, a small recovery in output in the  Community  with GDP growing by 2 % 
at annual  rates both in the  last quarter of 1982 and the  first quarter of 
1983. It is  however  not certain  that a durable recovery is  under way. A 
similar rise  in gross domestic product in the  last two quarters of 1981 
heralded  only renewed  recession  in 1982, and  some of the reasons for  last 
year's set-back are  still valid  today. 
The international  environment over the next two years  will be crucial 
for the recovery in the  Community.  Whilst the upswing in the USA appears to 
be confirmed, the burden of  external  debt in  many countries,  and falling 
revenues from oil in the  OPEC countries,  will limit  the growth of world trade, 
which will be close to zero in 1983, and around 3 1/2 % in 1984. On the other 
hand it is expected  that oil prices  will remain  stable  in nominal terms and 
the rise in non-oil  primary  commodity  prices  will be limited  by the slow 
pace of recovery in  demand  and the  size of free production resources. 
Overall  it is expected  that real GDP in the  Community  will rise by 
only 1/2 % in 1983 and 1 1/2 % in 1984. In 1984 there is expected to be 
considerable  disparity  between  Member  States,  with Germany,  the United 
Kingdom  and Italy growing by  more than 2 %, France and the Netherlands by 
0,5 % or  less. Unemployment  continues to  rise though at a lower  rate over 
the last few months;  the unemployment  rate reached 10,8 % in  April and is 
expected to  rise throughout the  forecast  period  to reach 11 1/2 % of the 
civilian  labour  force in 1984, about 13 1/2  million  people.  Even if the 
fall in employment  comes to an end as the recovery proceeds,  this will be 
insufficient  to turn round the growth of  unemployment. 
m m m / m m m 
(1) Commission  communication to the  European  Council on the  economic  and 
social situation  in the  Community  of 9 June 1983. The  figures  in this 
chapter  are revised  forecasts,  but they do not  differ substantially 
from those in the  above-mentionned  document. 

- 2 -
Marked progress has  been made in the  fight against  inflation:  over 
the last six months  the consumer  price index  (seasonally  adjusted) rose 
by only 7,6 % (annual  rate).  Moreover  there has  been a better  convergence 
of inflation  rates at the lower average  rate. The rise in consumer  prices 
in the Community  is expected to  fall to 5 3/4 % on overage for  '"">84,  the 
lowest rate of increase  since 1970. Even  if inflation  differc-ntials  remain 
significant,  price  rises  will moderate  in most Member  States;  this develop­
ment is due to a  substantial  reduction in  unit labour costs and to a  relative 
stability  in import  prices. 
With the terms of trade  moving  in the  Community's  favour in both 
years and  some improvement  in the  real trade balance from  mid-1983  on, 
the current account  deficit  will be reduced to approximate balance in 
1984. 
This forecast  has downward  risks associated with  it. The main con­
cerns are the course of US  interest  rates and its  likely  effect  on 
exchange  rates,  interest  rates in Europe  and the indebtedness  situation 
of LDCs. A rise in European  rates in line with the USA would  damage  the 
expected slow recovery in consumption and investment. An increase in the 
debt-service  ratio of LDCs could  seriously  affect  the stability  of the 
international  financial  system and  further  weaken  Community  export markets. 
Two major  policy  issues  arise from this outlook: 
- First,  it needs to be determined  whether  the speed of the  economic 
recovery  of output is appropriate, i.e. as favourable as can be 
expected in the circumstances. 

- 3 -
This  question has in  turn  two aspects, the relative speed of cyclical 
recovery as between countries, and the average for the Community as a 
whole. 
There is an undoubted need for growth rates over the next  18  months to 
be differentiated, to allow certain balance of payments disequilibria 
to be corrected and  further  internal budgetary and disinflation adjust­
ments to be pursued. 
Moreover, in spite of the constraints on several Member States, where 
activity cannot be boosted  until  the measures to put the economy back 
on a sounder footing have taken effect, it is possible  that  an average 
Community growth rate higher than the present forecast may be attainable 
in 1984.  Physical  capacity clearly is available, world commodity prices 
are weak, and there is the urgent need to reverse the rise in unemployment. 
The issue is whether a development along these lines can be more actively 
pursued by policy  without  prejudicing medium-term objectives, i.e. the 
credibility of stability-oriented monetary policies, reducing the growth of 
the public debt and restructuring resource allocation between public 
and private sectors. 
- The overall judgment on policy adjustments has to take  into  account 
the second major  issue,  namely the international monetary context. 
US interest rates have begun slightly to rise again, whereas for the 
Community the forecast recovery relies in part on reduction in interest 
rates both in the rest of the world and in Europe. If a combination 
of circumstances in the USA (a strong cyclical recovery, an unresolved 
budget deficit problem and a largely non-accomodating monetary policy) 
led to a more serious rise in US interest rates, the Council reconsider 
the position. 
The spontaneous tendency might be for a parallel upward movement of 
European  interest rates, accompanied by unchanged objectives for 
budgetary policy, but this would clearly undermine the forecast recovery. 
For the time being this is no more than a hypothesis, and it is in 
particular to be hoped  that  it could be avoided by rapid action in the 

- 4 -
U.S.A.  over its budget deficit. If, however, the unfavourable hypothesis 
proved to be founded, economic policies in Europe would have to b^ 
reconsidered. 

- 5 -
II. General budget policy guidelines 
The follow-up to the guidelines in the Commission communication of 
1 July 1982 on budget discipline and economic convergence shows  that  while 
encouraging progress was made in 1983 towards controlling public expen­
diture  (1) the problem of excessive public finance deficits is still 
acute in most of the member countries particularly because of the 
disappointing  trend  in public revenue. 
Action and risks for 1984 
In view of the prospects described briefly above, the task of 
budget policy in 1984 cannot be defined in simple terms. Some aspects 
of it  will  vary  from  one country to another, and it  will  need to be 
sufficiently flexible to be able to adapt to the eventual trends. 
Obviously,  to consolidate the progress already made in restoring 
a balanced development to the economy,  efforts  to reduce the public finance 
deficit in the medium  term  must not be relaxed and a particular aim should 
now be closer control over expenditure. 
In most of the Community countries, but particularly Belgium, Denmark, 
Greece,  Italy  and Ireland, the deficit is still very high and may well 
generate either excessive  liquidity  or higher interest rates, thus directly 
or indirectly affecting current balance of payments equilibrium. These 
pressures  are the result of a long period of persistent deficits, and 
the vigorous policies required in these countries in 1984 will, therefore 
in most  cases,  represent only an  initial  stage in an  effort  which  will  have 
to be sustained over several years. The external constraints which appeared 
in France in 1982 demonstrated  that  the public deficit needed to be strictly 
held in check. In the Netherlands, expenditure is so dynamic  that  the public 
deficit increases considerably each year, suggesting  that  a recovery of 
private demand  from  its present very depressed level would rapidly lead to 
the emergence of a serious imbalances. 
On the other hand, the reduction in the non-cyclical  part  of the 
public deficit in Germany and the United Kingdom - not only desirable, 
but now actually possible in those countries - should be managed  with 
caution so as to avoid adverse effects on growth. 
(1) See the  report  on budget discipline and economic convergence and on 
restructuring public expenditure in favour of productive expenditure 
(doc.J.  1/198/83 Rev.1) 

- 6 -
It is  difficult  to determine exactly how far the actual deficit is 
structural, so  that  its cyclical component could be underestimated; 
sometimes policies pursued could in effect become more restrictive 
than was actually intended by the authorities. 
Cyclical  adaptability 
If, over the next few months, the international financial situation 
and world economic conditions developed  less  favourably than now forecast, 
especially  if that  were in such a way as to force interest rates upwards, and 
if growth  in the Community was consequently slower than predicted, the 
measures  necessary to ensure recovery and to avoid applying a too rigorous 
monetary policy and too restrictive budget policy simultaneous would 
have to be taken 
In this  case,  the  built-in  stabilizers would at all events have to 
be allowed free rein except in those countries where the expansion of the 
public debt has become particularly disquieting. In Germany and the 
United Kingdom, where achievements on the inflation  front  have been the 
most remarkable, the reduction in the public deficit should be adapted 
to economic conditions by reducing the tax burden, while main­
taining the medium-term aim of a reduction in the share of public expen­
diture  in national income. 

- 7 -
The emphasis on the burden of the public debt 
To determine the required extent of budgetary restriction in the 
countries most seriously affected by fiscal imbalances, the basic cri­
terion should be the expansion of the public debt  - particularly the 
external debt  - and of its servicing cost. 
The steady rise in the ratio of public debt to national income 
in many Community countries (Belgium, Denmark, France,  Greece,  Ireland 
and Italy)  is likely to have an adverse effect on expectations, by 
pointing to heavier taxation in the future, or a prolonged increase in 
long-term interest rates. 
The burden of debt-interest is now so great  that  its share in 
total  expenditure is crowding out other items needed both for the 
development of productive activities in the public and private sectors 
and to safeguard reasonable levels of social welfare. Such crowding out 
is especially marked in Belgium, Denmark, Ireland and  Italy. 
These  pressures become even more acute when deficits are partially 
financed by having recourse to external resources as is the  case  in Belgium, 
Denmark, Ireland and, to a lesser extent, France. The resultant servicing 
costs  weigh heavily on the current balance of payments sometimes leading 
to serious imbalances; furthermore the burden of this debt is increased 
if exchange rates are adjusted. 
The problem can be permanently solved only by a substantial reduction in 
the deficit, but since a high interest burden on the accummulated debt is 
unavoidable initially, other items of expenditure must be temporarily 
sacrificed,  and in some  cases  an increase in taxation is inevitable. 

- 8 --
Priority_m ust go to measures affecting public expenditure 
As was the  case  last year, the Commission feels  that  a stable tax burden 
has an  important  role to play in economic recovery and therefore prefers 
solutions which minimise increases in taxation. 
From  the same  point  of view, it is  important  that  the structure 
of public expenditure be changed so as to give  priority  to expenditure 
which contributes to developing production potential and improving productivity. 
The experience of recent years has shown  that  the relative share of pro­
ductive expenditure has in fact actually declined in most Community 
countries.  Successful  restructuring depends not only on the provisions 
made  for productive purposes when the budget is drafted, but  also  on  closer 
and more effective control of other expenditure, particularly those items 
which are virtually automatic; too often, in order to accommodate overruns 
on these  latter  items, appropriations for the most productive projects are 
treated as optional and are sacrificed. 
(1) See the  report  on budget discipline and economic convergence and 
on restructuring public expenditure in favour of productive  expen­
diture  (doc.11/198/83 - Rev. 1). 

- 9 -
III. Conclusions 
In the  light  of the points made above, the Commission concludes : 
(i) that  the forecasts now available point to a recovery of economic 
activity in the Community; however, in most of the Member States, 
the rate of expansion will be low or moderate, and continued 
recovery at a satisfactory rate in 1984 is not guaranteed, both 
because  of the uncertain international climate and because of 
languishing domestic demand, especially business investment; 
(ii) In those countries where the results of policies pursued show 
sufficient progress towards overall economic balance, some room 
for manoeuvre exists to assist the recovery. To ensure  that  such an 
approach is credible, it should fit in  with  the medium-term prospects 
for controlling the public sector deficit and restructuring public 
finances in favour of productive activities. On the other hand, 
in most member countries the situation  with  regard to public finances 
still requires  that  priority  should be given to a reduction of the 
budget deficit and of the ratio of public expenditure to national in­
come. 
The Commission would ask the Council to agree : 
(i) that  if economic expansion were to be lower than forecast, the 
built-in stabilizers should be given a free rein except in the 
countries where the public debt is especially disquieting; the 
countries where the budget deficit has been brought back  within 
acceptable  limits could consider some reduction in taxation in 
order to prevent the development of  further  recessionary pressures. 
(ii) that  budgetary policies should continue to concentrate on medium-
term improvement, but be applied  with  sufficient flexibility to 
deal  with  unpredictable cyclical hazards, thus contributing to 
the convergence of economic trends in the Community; 
(iii)  that  in each Member State and at Community  level,  monetary policy 
and budgetary policy should be closely coordinated so  that  they do not 
combine to slow down growth - which is still very modest - and 
aggravate unemployment in the event of a deterioration in the inter­
national monetary situation.