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DOCUMENTS "COM"
COM(82)422
Vol.1982/0141

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COMMISSION OFTHEEUROPEAN COMMUNITIES
COM(82)422final J
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Brussels,1july1982
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BUDGETDISCIPLINE ANDECONOMIC CONVERGENCE
(Communication fromtheCommissiontotheCouncil)
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TheCommission transmits totheCouncil acommunication concerning
themanagement ofpublic finance .Thecommunication hastwoaims :
-toplace inamore general framework thediscussion which the
Council will have onthe12th July next ,inconformity with
Article 3ofthedecision ofthe18th February 1974 ,about j
thefixing ofquantitative guidelines for1983 budget proposals ;
-toreinforce ,andapply inaconcrete fashion ,theexisting procedures
toachieve better convergence oftheCommunity economies .
TheCommission reserves theright tosubmit later totheCouncil
communications about other important aspects ofconvergence .
XXX
ECONOMIC DEVELOPMENT AND' STRUCTURAL IMBALANCES INTHEBUDGET
Inmany member states themanagement ofpublic sector finances isnotmaking a
sufficient contribution towards theeffort ofeconomic stabilisation and
ofputting theeconomy onasound footing .TheCommission hasdrawn atten­
tion tothis problem onseveral occasions (1).Itisnottherefore worth­
while toembark again onanexact analysis ofhowthis situation arose and
what itseffects are .Rather theCommission considers itnecessary topro­
pose ageneral framework forthemanagement ofpublic sector finances which
should make itpossible :
-topromote ,inanimportant aspect ,amore convergent development of
theeuropean economies,' thereby strengthening theE.M.S. ;
-toreaffirm that budgetary instruments will maintain ,orregain ,those
characteristics that should enable governments tomake thebest useof
them tobenefit economic equilibrium ,development andemployment ;
-inparticular ,toensure that thebudget isable tocontribute toachie­
ving priority objectives which aretore-establish competitiveness ,the
modernisation ofeconomic structure ,andthedevelopment ,tothebenefit
ofemployment ,oftheproductive sector ;
-finally totake care that thereduction insavings duetothebudget
deficit does nothave anadverse impact onproductive activity which
would accentuate ,tothedetriment ofthe.se activities ,theeffects
ofamonetary policy conducted within strict limits ,andcontribute
tohigh interest rates .
(1)Annual Economic Report 1980-81 (COM (80)596final );Draft Fifth Medium -
Term Economie Policy Programme (COM (81)3^4final );Annual Economie
Repbrt 1981-82 (COM (81)596final ).

Thepossibility ofusing budgetary policy tostimulate economic activity
during certain phases ofthecycle isnotbrought into question .Nevertheless
thegrowth andthedynamism oftheeconomies areatpresent adversely affected
bythestructural imbalances ofthepublic sector budgets .Correcting these
structural imbalances isanecessary step towards better growth andbetter
employment .
Thepresent communication endeavours todefine themeans toenable thegenuine
control ofpublic sector finances toberegained .
II.TRENDS CHARACTERISTIC OFTHEPUBLIC FINANCE SITUATION V
Thedata reproduced intheannexed table reveal anumber of
unfavourable trends and situations :
-theabsolute andrelative growth ofpublic expenditure accelerated after
theeconomic crisis whichbecame apparent intheearly1^70s ,whereas the
growth ofreceipts washeld incheck ;fortheCommunity asawhole ,the
share ofpublic expenditure ingross domestic product rose from 32.1 %in
1960 to37.7 %in1970 toreach 49.8% in1982 ;theshare ofcompulsory
levies stands at44.8 %in1982 asagainst 37.6 %in1970 and32.7 %in
1960 ;
-agroup ofcountries (Belgium ,Denmark ,Greece ,Ireland andItaly )has
slipped into amore unbalanced position than others because each
hasbeen less successful incontrolling theaccelerating rate ofgrowth of
public expenditure orfaced opposition toheavier taxation orparafiscal
charges ;insome cases theincrease inthecharges onpublic debt ,particularly
external debt ,hasplayed animportant role inthis context ;
-thestructure ofpublic expenditure hasbecome modified sothat transfers to
households andoperating expenditure arefavoured attheexpense ofpublic in­
vestment andexpenditure toback upandstimulate more balanced economic deve–
lopment (e.g. research anddevelopment ,energy saving ,support foradvanced
technology industries ),4thus theratio ofpublic investment tothetotal of
public expenditure fell from 10,1 %in1960 to6%in1982 ,whereas theratic
forcurrent transfer increased ,over thesame period ,from 39,4 Xto44%„

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III.THEREMEDIES
Effortstoreducethedeficitsmustbeconcentrated ontheareaof
publicexpenditure :itsrisemustbestrictlylimitedanditsstructure
improved.Giventhesubstantial bodyofexpenditure whichitisdifficultto
cutbackandtheneedtoensureacertainlevelofsocialsecuritybenefitsthese
twoobjectives canbeattainedonlybyredefiningcertainpriorities and
revisingtherulesandlegislation whichnowmeanthatmuchpublicexpen­
ditureincreasesautomatically ;thiscouldleadtofallsinpublicconsumption
andtransferexpenditures inrealterms.Thesacrifices involvedinthe
reorganisation ofthewholebodyofexpenditure mustbefairlyshared
outbetweenthevarioussocialandprofessional groups.
Thereislessscope,forincreasingtaxation,norisitdesirableto
doso,notablybecauseofthehighlevelalreadyreachedbythecompulsory
taxrates.Heaviertaxationleadstomoreevasion,isadisincentive topro­
fessionaleffortwhenthemarginalratesoftaxbecomeprohibitive evenon
averageincomes,andputspeopleonlowincomesatadisadvantage whenin­
directtaxesarehigh.Itiscertainlyfeasibletoraisecertainratesof
contribution inordertofinancehigherexpenditure (notablyonunemployment
andsicknessinsurance)wherethereisaclearlinkbetweenthelevyandthe
benefit,andtheperiodicrevisionofspecifictaxescouldtakeplaceatshorter
intervalsthaninthepast,butsuchadjustmentswillhavealimitedfinancial
impact,varyingfromcountrytocountry.
AlastingImprovementofthepublicfinancesituation canonlybeachieved
ifbackedbyproceduresdesignedtokeeptheexerciseofbudgetarypowersincloser
harmonywiththekeyeconomicequilibria.Thismeans,insomecases,actual
reformsofthebudgetlegislation,andinothersagreaterrespectforthe
legislation whichexists. ;
TheCommission thereforerequeststheCounciltoacceptthefollowing
fourguidelines,voluntarily presentedinschematicform,which,however,
shouldbeimplemented ineachMemberStatewhile,ofcoursetakinginto
accountindividual situations .
9
mm•/•••

4-
1.Controlofthebudgetaryaggregates :
-Reduction_of_tje_borrow2ng_reguirement.Thegeneralgovernmentborrowing
requirement,asaproportionofgrossdomesticproduct,mustata
minimumbestabilised,andinthemajorityofcountriesevenreduced,
towhatextenttobestatedintheannualbudgetguidelines;
-Reducti_on_and_reor;2ani sati_on_of_exgenditure.Thissounderbudget
situationmuststemprimarilyfromareductioninthegrowthofpublic
expenditure,inrealterms,orfromanabsolutecutifthemagnitudeofthe
correction demandsit.Thestructureofpublicexpenditure mustbe
alteredtotakeaccountoftherapidincreaseincertaintypesof
expenditure whichitisdifficulttocutback,andtheneedtoleavemore
roomforthebudgetappropriations thathelpthebalanceddevelopment
oftheproductivesector;
-ChaQ2es_2n_taxation_and_social_security_contribut ions.Actionneedsto
betakenprincipally withregardtoexpenditure ,*changesintaxation
andsocialsecuritycontributions mustnotbpruledoutasmeansof
adjustment,butcanonlybeasecondaryinstrument andshouldinany
eventtakeaccountofpossiblerepercussions onemployment;
-Public_utiIit£_charc[es_and_2a£rnent s.Theusershouldbemadetobeara
largershareofthecostofthosepublicserviceswhichcanbe
attributedtotheindividual,whichmeansamoreregularadjustment
ofpublicutilitychargestoincreasesincosts,andawideruseof
paymentsfortheservicesprovidedbythepublicauthorities ;
-Annual_targets_wri tten_into_a_mult2-annua l_framework.Inviewofthe
changestobemadeinthevolumesandstructuresofbudgets,the
MemberStatesmusteachyearsetthemselves abudgettargetinkeeping
withareturntobudgetarysoundnessinthemediumterm,andadhereto
itstrictly.Thelargeovershootsobservedforcertaincategoriesof
expenditure mustbeoffsetbycutsinothersectorsorbyanincrease
inreceipts.
2.Application ofstrictbudgetaryprocedures :
~§yd2et_ti_metable .basicbudgetlawshouldprescribetheadoptionof
thegeneralbudgetbeforethestartofthefinancialyear:thisimplies
that,whereappropriate andonlywhenthebudgetcannotbesoadopted
forreasonsoutsidethegovernment'scontrol,theprovisional monthly
allocations shouldnotexceedtheleveloftheprecedingyear;
-Monitori_ng_of_bud2et_2mglementat ion.Eachgovernmentshouldtakestock,
atleasttwiceayear,ofthebudget'simplementation andintroduce,
withoutdelaybeforeParliament,proposalsamendingtheoriginalbudget
withoutfinancing,bycashadvances,expenditure subsequently submitted
forParliament'sapproval.Ifthebudget'sfieldofapplicationvaries
fromoneyeartoanother,theeconomicandfinancialconsequences
shouldbeclearlyindicated.
•sa/•••
V

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3.Application ofstrictprinciplesofbudgetmanagement :
-Current_account_eguHi.br2um .Budgetarylegislationmustobligethe
executiveauthoritytopresentbudgetswhichareinequilibrium as
regardscurrent -accountoperations (nationalaccountsdefinitions),
afterashorttransitional periodforthosecountrisswithparticularly
heavydeficits.Thebudgetwillhavetocontainacontingency reserve
largeenoughtocopewiththemarginalvariationsinexecutionwithout
theneedforasupplementary budgettobedrawnup,andwillhaveto
specifytheconditions inwhichthisreservecanb»used;
-The_cover2Q9_of_add2t ional_exg"endjture.Inthecountrieswherethe
legislativeauthorityhastherighttoinitiateexpenditure,exercise
ofthisrightmustbeaccompanied bythecompulsorypresentation of
proposalsonthelasting(andnotjusttheimmediate)financial
consequences intermsofadditionalfundsandorexpenditure cutsin
otherareas.Generallyspeaking,itwouldbedesirableforthemulti-
annualfinancialplantoincludeanevaluationofthemedium-term
financialeffectsofadoptingadraftorproposedlawduringthe
financialyear. |
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4.Moreseverefinancingcriteria : j
-Thepublicdeficitsmustbefinancedatthelowestcos{compatiblewith j
thefullrespectofthefinancialmarketmechanisms an<-iofthenecessary I
autonomyofmonetarypolicy.Thismeansrulingoutor!restrictingpractices
suchasthedirectfinancingoftheTreasurybythecentralbank,the 1/
monetization ofpublicdebtsecurities bythebankingsystem,theuseof
regulatorypowerstoimposethesubscriptiontopublicdebtsecuritieson jpreferential terms,theindexationofthepublicdebt,theissue,ofsecurities i
withshorter-than-minimummaturities (threemonths),themassiveuseof fshort-termissues,theexcessivefloatingofpublicloansabroad,theover-[
readinesstouseStateguaranteestobackforeignborrowingsabroadby jpublicorprivateundertakings . :
h
IV.TAILORINGTHEREMEDIESTOINDIVIDUALCIRCUMSTANCES j
Althoughtheachievementofasounderbudgetsituationmustbe j
aguidelinecommontotheCommunityasawhole,theemphasisorvandconnection j
between,themeasuresneededmustbetailoredtotheindividualcircumstances \
ofeachMemberState. i
-Rigorousactionisnecessaryinthosecountries(Belgium,Denmarkand
Ireland)runningaheavydeficitonbothpublicfinanceandthebalance
ofpaymentsoncurrentaccountandinthose(ItalyandGreece)wherethe
reductionofinflationhasbeenthwartedbythesizeofthepublicdeficit
andthemethodofmonetaryfinancing.

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Iftangibleresultsdonotstarttoberecordedrapidlyin1982and
1983/thebudgetpositionwillinevitablydeterioratesubstantially
(inparticularwithregardtopressureonsavings,anexcessivepart
ofthebudgetaffectedbytheweightofdebt,levelsofinterest
rates,growingneedforexternalfinance).
Inallthesecountries,asustainedeffortinthemediumtermwill
benecessarytoachievelastingbudgetsoundness;itmustalsobe
accompanied bytheappropriate reformsofbudgetaryprocedures or
bythestricterapplication ofthelegislation whichexists.
-Inthreeothercountries (France,LuxemburgandlesssointheNether­
lands),thegeneralgovernment borrowingrequirement hasnotreacheda
particularly highproportion ofGDP,butitisnecessary
tochecktheupwardtrendseeninthelastfewyearsandwhichis
liabletocontinuein1983.
InFrance,thecontrolofpublicfinanceisanindispensable component
ofthepolicyofreducinginflation andrestoringexternalequilibrium .
IntheNetherlands ^thebudgetdeficitmustbecutsubstantially becauseofthe
prospectofafallinnaturalgasproduction and,intheshortterm,
inordertocreatebetterconditionsforinvestment,expansion and
employment .InLuxembourq,wherethebudgethastraditionally beenin
surplus,thecostofthedirectmeasurestoassistemployment has
becomesohighthatwaysofoffsettingitmustbefound.
-Finallyprudencewithregardtopublicexpenditurewillcontinuetobe
necessaryintheFederalRepublicofGermanyandintheUnitedKingdom
whereimportanteffortshavebeenmadetocontroltheborrowingrequire­
mentandtoensureconsistency withmonetarypolicy.Itwouldbe
appropriate howevertoavoidanexcessivelevelofborrowingwhilst
atthesametimegivingmoreweighttoexpenditure thatwillcontribute
tostrengthening thedevelopment potentialoftheproductivesector.
V.TheCommissionaskstheCounciltoretainthefourguidelinessetoutin
§IIIofthepresentcommunication andtoarrarfge,fortheendofthe
year,adiscussionofafirstreportwhichtheCommissionwillsubmit
concerningtheimplementation oftheseguidelines.

Principalpublicfinanceaagregates (1)
19601970 197519801982 1960197019751980
1„Generalgovernment expenditure
as%ofGDP
b 30,536,544,754,259,727,635,2i0,4'44,8
OK ?S,543,149,558,460,028,146,147,552,5
D .52,037,146,646,9*7,735,237,540,8 <■3,5
GR 23,829,132,535,640,220,026,827,430,2
F 3-,638,142,546,251,135,539,040,346,6
IRL 26,738,947,053,859,025,435,335,741,0
I 29,935,647,745,952,129,130,631,637,8
L2^332,548,056,9 32,335,349,255,1
Ν".33,2A4,855,258,059,834,044,052,554,6
UK 32,638,345,8A3,944,6'31,640,840,940,4
Cf. 37,7 «5,947,249,832,737,640,143,6
j.Balanceofcurrenttransactions
generalgovernment,as%ofGOPof
!Β-0,72,2-0,7-4,A-7,6i"2,9-1,3-*,3-9,4
i 6,48,92,7-2,0-5,2!2,63,υ-2,0-5,9
•i> 7,45,9-0,82,30,83,1o,i!-5,8-3,5
IGZ 2,34,40,70,2-4,0-3,7-?,3 1-5,1"5,4
ιF 4,64,31,13,50,20,9ο,ν ;-2,20,5
iT&L 1,81,1 .-6,3-4,7-6,1-1,3-3,7-11,3-12,8
!1 3,0-1,1"9,5-3,6-6,4-0,8-5,0-16,1-8,1
'I !7,86,57,98,89,13,02,9 "1,8
■wuI5,94,32,12,0-0,10,8-0,3-2,7-3,4
1u*'M7,6-0,4-0,50,2-1,0:,5-4,9-3,5
!CaI*'24,6~1,20,8-1,10,6-0,1"5,9-3,6
15.Publicdebt. 6.Generalgovernment grossfixed
1as%ofGDP talformation,astofGDP
Β 57 5170 1,93,53,33,9
OK 18 15«3 3,35,0V"3,3
0 18 2431 3,24,13,4'•,9
GR 21 2228 6,16,75,<*5,6
f 17 1516 !2,93,12Λ2,7
IRL n.d.76 91;2,82,04,06Λ
I 29 5850 3,5.'¿,93,4 3,?
.L 33 2526 4,72,65,79,1
NL 68 414ci4,04,13,33,3
UK 86 6957I3,3:3,83.52,'.
C1)Thedefinitions usedarenationalaccountsdefinitions ^Figuresdonotnecessarily addupbecauseofroundinq*
1.expenditure :currentandcapitalexpenditureexcludingloans,advancesandequities;, '"3 uvi*w»•ui.iu«-««.I«,j^
e.receipts:directandindirecttaxes,socialsecuritycontributions *othercurrentre­
sourcesandconsumption offixedcapital;
3.balanceofcurrenttransactions :governmentgrosssaving.
4.netlendingorborrowing:balanceofreceipts-expenditure (2-1);
5.publicdebt:centralgovernmentdebt+debtoflocalauthorities,excludingcentral
bankadvances. ,
–0urccs:0EC0NationalAccounts1960-1979.ServicesoftheCommission 1980-1982(1982
estimated).Bundesministerium derFinanzenforpublicdebt.