Communication from the Commission to the Council and the European Parliament - Public finances in EMU – 2008 – The role of quality of public finances in the EU governance framework {SEC(2008) 2092}
Date: 2008-06-24
Institutions: European Commission
Subjects: Economic and Monetary Union, budget policy, economic growth, economic policy, public finance

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 24.6.2008 
COM(2008) 387 final 

COMMUNICATION FROM THE COMMISSION  
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 

Public Finances in EMU – 2008  

THE ROLE OF QUALITY OF PUBLIC FINANCES IN THE EU GOVERNANCE 
FRAMEWORK  

{SEC(2008) 2092}

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I. 

INTRODUCTION 

On the back of favourable economic conditions as well as consolidation and reform efforts, 
public  finances  have  improved  significantly  in  the  EU  and  the  euro  area.  Although 
differences  remain  large  across  countries,  in  2007  the  government  deficit  in  the  euro  area 
and in the EU as a whole reached the lowest level since the early 1970s, respectively 0.6% 
and  0.9%  of  GDP.  Reflecting  the  improvement  of  fiscal  balances,  the  level  of  outstanding 
debt stayed on a clear downward path. In the EU as a whole it has already fallen to below 
60% of GDP, while in the euro area it is approaching this reference value.  

Despite this progress, EU Member States are still facing a number of major challenges that 
leave  little  room  for  complacency  on  fiscal  policies.  First  and  foremost,  potential  GDP 
growth is still constrained in many Member States, reflecting an inefficient use of resources, 
including by the public sector. At the same time, the current economic juncture with strong 
inflationary pressures is reducing the room for manoeuvre in the conduct of policies. Second, 
the  ongoing  process  of  demographic  ageing  will  weigh  on  the  sustainability  of  public 
finances  unless  the  consolidation  process  is  continued  and  accompanied  by  structural 
reforms that reduce its budgetary cost. And third, increasing exposure to global competition 
puts  pressure  on  EU  governments  to  lower  the,  on  average,  relatively  high  tax, 
administrative and regulatory burden in Europe and to improve provision of public services 
and goods, so as to deliver much-requested better value for money.  

To address these challenges a comprehensive fiscal policy approach that raises the quality of 
public finances and supports long-term economic growth is called for. Policy action can be 
more  growth-friendly  and  competitiveness-enhancing  through  measures  that  help  raise  the 
efficiency  of  expenditure  and  revenue  systems.  Such  a  broad-based  approach  would,  by 
creating new fiscal space, directly contribute to further fiscal consolidation and mitigate the 
debt sustainability challenge. At the same time, these measures can have an indirect impact 
on budgetary balances through their effect on economic growth and employment.  

From  the  viewpoint  of  EU  economic  surveillance,  stronger  focus  on  the  quality  of  public 
finances  opens  up  a  promising  avenue  to  better  link  the  different  instruments  of  economic 
governance,  specifically  the  Stability  and  Growth  Pact  (SGP)  and  the  Lisbon  Strategy  for 
Growth  and  Jobs.  This  would  respond  to  a  demand  first  expressed  in  the  March  2005 
Council  report  on  the  reform  of  the  SGP  and  underlying  successive  conclusions  of  the 
European  Council  and  the  Ecofin  Council  pertaining  to  specific  aspects  of  the  quality  of 
public  finances.  Most  recently,  the  Commission  Communication  EMU@10:  successes  and 
challenges after 10 years of Economic and Monetary Union 1 called for a deeper and broader 
approach  to  fiscal  and  economic  surveillance,  with  greater  focus  on  quality  of  public 
finances and its links to growth, as one key element inter alia for the smooth functioning of 
EMU.  The  present  Communication  discusses  areas  of  public  finances  where  improving 
quality would make it possible to tap the potential synergies across the main instruments of 
EU economic policy coordination.  

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COM(2008) 238 final, 7.5.2008. 

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II. Current implementation of fiscal surveillance  

After  nearly  a  decade  of  experience  with  the  EU  fiscal  framework,  including  the  recent 
episodes  of  fiscal  consolidation,  a  number  of  lessons  can  be  drawn.  These  are  particularly 
relevant given the large degree of uncertainty attached to current economic prospects.  

II.1 Lessons from past experience 

The experience accumulated after the 2005 reform of the Pact is, on balance, positive.  

The  dissuasive  arm  of  the  SGP,  which  deals  with  the  correction  of  excessive  deficits,  has 
clearly  delivered  in spite of the concerns voiced by some that the 2005 reform  of the Pact 
would  lead  to  a  relaxation  of  the  rules.  Violations  of  the  3%  of  GDP  deficit  threshold 
continued  to  result  in  countries  being  subject  to  the  excessive  deficit  procedure.  Hence,  in 
spring  2006,  no  less  than  twelve  Member  States  were  subject  to  the  excessive  deficit 
procedure.  The  Council  recommendations  and  decisions  issued  for  countries  in  excessive 
deficit  typically  asked  for  ambitious  fiscal  corrections,  equal  or  even  bigger  in  size  than 
those under the “old” Pact. The required adjustment period was extended when appropriate, 
but this was necessary only in rare cases. Two-and-a-half years on, the number of Member 
States subject to the excessive deficit procedure is nearing zero as fiscal improvements have 
generally been in line with or even exceeded the recommendations by the Council, reflecting 
not only favourable economic conditions in 2006 and 2007 but also significant consolidation 
efforts. 

The  implementation  of  the  preventive  arm  of  the  SGP,  which  requires  Member  States  to 
adjust  their  budgets  until  sustainable  fiscal  positions  are  achieved,  has  improved.  The 
preventive arm is built around medium-term budgetary plans laid down by Member States in 
the  annual  updates  of  the  stability  and  convergence  programmes  (SCPs),  which  are  key 
components in the implementation of the EU fiscal surveillance framework. The preventive 
part of the SGP has contributed to achieving in 2007 the best budgetary results in decades, 
with many Member States being close to balance or in surplus. However, in a few countries 
little progress has been made toward medium-term budgetary objectives. More generally, a 
number of points as regards the experience with the preventive arm should be noted. 2 

•  Over time many Member States have not fully implemented their medium-term budgetary 
strategies.  Most  fiscal  plans  envisaged  more  or  less  ambitious  restraints  of  government 
expenditure combined with a reduction of the  tax  burden,  but  two  thirds  of  the  planned 
budget  balance  improvements  were  not  reached  and  three  quarters  of  government 
expenditure  targets  were  overshot.  Moreover,  fiscal  corrections  were  often  postponed, 
turning the medium-term budgetary objectives into moving targets rather than anchoring 
fiscal policy. 

•  Nevertheless, a number of success factors for better adherence to medium-term plans and 
stronger  fiscal  positions  have  emerged.  The  Commission  analysis  shows  that  countries 
with sound fiscal governance, in particular strong national fiscal rules and medium-term 
fiscal  frameworks,  had  better  budgetary  outcomes  and  tended  to  stick  more  closely  to 

2 

Analytical  work underpinning  these  conclusions  was presented  in  the  European  Commission’s 2006 
and 2007 Public finances in EMU reports. 

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budgetary  plans.  This  role  of  fiscal  governance  has  been  explicitly  recognised  in  the 
reformed SGP and in successive Council conclusions. Moreover, fiscal adjustments that 
laid the emphasis on expenditure cuts, other than investment, had a higher chance to be 
lasting than those with a focus on revenue increases. 

•  As regards structural reforms, the view that they may conflict with fiscal consolidation is 
still  widespread  but  such  a  perception  is  unwarranted.  Evidence,  including  the  recent 
progress under the Strategy for Growth and Jobs, suggests that structural reforms can be 
an integral part of successful medium-term fiscal consolidations and hence be conducive 
to making a fiscal correction last. Moreover, to the  extent that structural  reforms, while 
beneficial to long-term sustainability, entail budgetary costs in the short run, the revised 
SGP allows this to be taken into account when assessing progress towards the medium-
term budgetary objectives (MTOs). 

II.2 Risks attached to the short-term outlook 

Against the backdrop of weakening short-run economic prospects for the euro area and the 
EU,  a  number  of  risks  in  the  assessment  of  the  2007  public  finances  and  their  outlook  for 
2008-09  have  emerged.  While  most  observers  concur  that  the  European  economies  are 
relatively  well  placed  to  withstand  the  fallout  from  the  credit  crisis  and  the  surge  in 
commodity prices, there is also agreement that the euro area and the EU as a whole will not 
be  immune  to  the  US  economic  slowdown  and  the  inflationary  context.  This  view  is 
evidenced by the downward revisions of EU economic growth forecasts for 2008 and 2009 
to  2.0%  for  2008  and  1.8%  for  2009  in  the  Commission  services'  spring  2008  forecast. 
Consequently, caution is called for in two areas of EU public finances:  

•  The use of revenue windfalls to raise government expenditures or to lower tax rates risks 
turning  into  a  serious  constraint  in  the  coming  years.  While  the  jury  is  still  out  on  the 
actual  drivers  of  the  tax  buoyancy  in  2006  and  2007,  experience  suggests  that  a 
significant part of it may be short-lived. Specifically, the favourable asset price cycle and 
the  boom  in  corporate  profits,  which  gave  rise  to  extra  revenues  in  the  past  two  years, 
have  come  or  are  coming  to  a  close.  As  growth  abates,  a  reversal  in  the  tax  content  of 
GDP  would  strain  the  budgetary  situation  of  Member  States,  which  have  used  revenue 
windfalls to cover expenditure slippages and plan on further expenditure growth. It would 
also  reduce  their  capacity  to  let  automatic  stabilisers  play.  Recent  expenditure  overruns 
have been contrary to the policy advice in the Council opinions on the 2006 updated SCPs 
and,  for  the  euro-area  countries,  the  commitments  made  in  spring  2007,  notably  “to 
implement  their  2007  budget  as  planned,  avoiding  expenditure  overruns  and  using 
unexpected extra revenues for deficit and debt reduction”. 3  

•  There  is  also  a  risk  that  medium-term  growth  prospects  have  been  overestimated  as  the 
EU seems to have reached the peak of an economic cycle. Output gap estimates for 2007 
suggest that the euro area and the EU as a whole were operating only marginally above 
potential. However, this stands in contrast to many other business cycle indicators, such 
as the rate of capacity utilisation in the manufacturing industry, which indicated that the 
EU  was  in  fact  operating  clearly  above  potential  (i.e.  in  “good  times”).  A  similar 

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Eurogroup spring orientation debate on budgetary policies: Orientations for fiscal policies in euro area 
Member States, 20 April 2007. 

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constellation  was  observed  at  the  end  of  the  1990s,  when  fiscal  policy  makers  failed  to 
appreciate the exceptionally favourable phase of the cycle.  

Overall,  the  remaining  shortcomings  in  adhering  to  medium-term  budgetary  plans  and  the 
risks  to  the  public  finance  outlook  call  for  a  continued  effort  to  further  strengthening  the 
implementation of the EU fiscal surveillance framework, notably by increasing the attention 
to the quality of public finances.  

III.  Quality  of  public  finances  as  an  instrument  to  improve  fiscal  and  economic 
surveillance 

Past  experiences  and  current  economic  risks  strengthen  the  case  for  a  greater  focus  on 
quality of public finances in budgetary and economic surveillance. Quality of public finances 
can  be  viewed  as  a  framework  with  multiple  dimensions.  It  goes  beyond  low  deficits  and 
debt  levels,  which  remain  its  linchpin,  but  also  comprises  all  fiscal  arrangements  and 
institutions  that  contribute  to  an  efficient  allocation  of  resources  and  support  achieving 
macroeconomic  goals,  in  particular  long-term  economic  growth,  and  would  facilitate 
reaching other objectives such as equity and social cohesion. These dimensions of quality of 
public  finances  include  the  composition  and  efficiency  of  public  expenditure,  the  structure 
and  efficiency  of  revenue  systems,  fiscal  governance,  the  size  of  governments,  and  those 
public  finances  policies  that  affect  the  functioning  of  markets  and  the  overall  business 
environment.  

Better  quality  of  public  finances  can  contribute  to  addressing  the  EU’s  fiscal  policy 
challenges  via  two  mutually  reinforcing  channels:  (i)  directly,  by  raising  expenditure  and 
revenue efficiency, i.e. by better using public resources; and (ii) indirectly, by reducing the 
cost  for  society  and  lowering  distortions,  fostering  long-term  economic  prospects  and 
strengthening  the  ability  to  adjust  to  shocks.  The  main  transmission  channels  from  the 
various  dimensions  of  quality  of  public  finances  and  broad  policy  lessons  for  the  EU  are 
summarised below. 4 

•  For  a  given  spending  envelope,  public  finances  can  contribute  to  economic  growth  and 
sustainability  through  the  composition  and  efficiency  and  effectiveness  of  public 
expenditure.  Both  theoretical  and  empirical  research  indicates  that  growth  can  be 
supported  when  public  expenditure  is  oriented  towards  investment,  underlining  also  the 
point that fiscal consolidation based on investment cuts, as evidenced in some periods in 
some Member States, can be problematic in the long run. The impact on growth is largely 
driven  by  public  investment  in  human  capital  (through  education  and  health  spending), 
technical  progress  (R&D  spending)  and  public  infrastructure.  These  are  key  areas  of 
European  regional  and  cohesion  policies.  However,  evidence  also  shows  that  the  link 
between the amount of spending in these areas and economic growth is not automatic, but 
depends largely on the ability to achieve the envisaged outcomes (e.g. higher educational 
attainment,  more  private  investment  in  R&D)  and  overcoming  existing  market  failures 
without  creating  new  distortions.  In  this  context,  respect  of  State  aid  rules  can  be 
instrumental. Currently, empirical estimates of efficiency of public education and health 
spending  indicate  great  differences  across  Member  States,  with  ample  room  to  either 

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For a more detailed analysis see the report Public finances in EMU – 2008. 

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economise  on  the  use  of  public  resources  or  improve  outcomes.  The  first  option  would 
allow  the  much-needed  fiscal  space  to  be  created  for  other  demands,  for  example  from 
ageing populations, or for tax cuts. The second option could contribute to growth through 
higher labour productivity.  

•  The structure and efficiency of revenue systems can also be a factor for long-run growth, 
in  particular  with  increased  competition  for  mobile  tax  bases  and  factors  of  production 
placing  additional  constraints  on  public  policies.  The  tax  structure  affects  the  growth 
potential through its impacts on labour supply and demand, incentives for investment, risk 
taking and human capital formation. While lowering distortions through a reduction in the 
overall tax burden is always desirable, it would have to go hand-in-hand with expenditure 
reforms.  An  important  further  policy  option  is  therefore  to  adapt  tax  structures  in  a 
revenue-neutral manner. For example, easing the tax burden on labour by shifting it to a 
wider tax base, such as VAT, could foster employment and growth. In model simulations 
by the Commission services for the euro area, a 1% tax shift of GDP from labour taxation 
to consumption taxation is estimated to raise real GDP by about 0.2% and employment by 
about 0.25% in the long run. The impacts depend strongly on institutional and structural 
factors,  such  as  the  indexation  of  transfer  payments  and  the  response  of  wages.  In 
addition  to  widening  the  tax  base  and  lowering  the  tax  rate,  efficiency-enhancing  tax 
reforms should make tax systems simpler and more transparent, and link them better with 
benefit  systems.  As  a  result  of  a  tax  shift  from  labour  to  consumption  taxation,  the 
difference  in  income  between  wage  earners  and  the  inactive  population  typically 
increases.  These  consequences  in  terms  of  redistribution  and  equity  should  be  properly 
addressed. 

•  Good fiscal governance can enhance all dimensions of public finances. In addition to the 
earlier highlighted role that national fiscal rules and medium-term budgetary frameworks 
play  in  strengthening  budgetary  performance,  fiscal  governance  can  also  contribute  to 
fostering  expenditure  efficiency,  better  target  public  expenditure  and  support  public 
finance  reforms.  Reflecting  these  opportunities,  most  Member  States  are  already  in  the 
process  of  collecting  more  information  on  the  performance  of  public  spending  with  the 
objective of putting less emphasis on input-oriented management of public resources and 
more  stress  on  results-orientation.  The  practical  implementation  is  very  complex, 
however, and advances differ greatly across countries. At the same time, much room for 
improvement is left as regards the conduct of Member States’ policies over time, as the 
frequent  deviations  from  SCPs  have  shown.  Putting  in  place  stronger  medium-term 
budgetary  frameworks  offers  a  chance  to  overcome  political  economy  considerations  in 
both the design and implementation of fiscal policy. This could contribute to broadening 
the focus of discussions from the overall spending envelope to other aspects such as the 
allocation  of  spending,  including  on  growth-enhancing  items,  and  the  structure  and 
efficiency of revenue systems. Thus, strong fiscal governance can not only help keep the 
overall size of the public deficit in check, but is also a framework in support of a broad 
reform agenda in other areas of quality of public finances, ultimately affecting outcomes 
in terms of efficiency and size of the government sector. 

•  The size of governments tends to matter for economic growth, because it is closely linked 
to other dimensions of quality of public finances. When public finances areas are in good 
shape,  maintaining  relatively  large  public  sectors  and  satisfactory  economic  growth  can 
go hand in hand. However, a broad set of empirical studies, including some preliminary 
analysis by the Commission services, finds that public sectors can become a drag on the 

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economy  if  they  are  characterised  by  high  tax  burdens,  high  public  consumption  and 
inefficient  public  spending  and  administrations.  Problems  are  compounded  by  large 
deficits and debts.  

•  Public  finances,  through  budgetary  and  non-budgetary  items,  can  also  impact  the 
functioning of markets and the business environment. In addition to the above-mentioned 
roles  of  efficient  public  expenditure  and  revenue  systems,  public  finances  also  play  a 
particular  role  through  their  impact  on  wage  setting  (e.g.  public  sector  wages),  labour 
market  participation  and  mobility  (e.g.  benefits  systems),  and,  more  generally,  the 
business  environment  (e.g.  through  the  provision  of  a  well-functioning  judicial  system 
and public infrastructure). However, public finances are only one element in ensuring the 
smooth  functioning  of  labour,  product  and  services  markets  obviously  and  need  to  be 
accompanied by an efficient regulatory and legal framework. The Commission services’ 
preliminary analysis suggests that total factor productivity and skilled labour contribution 
to GDP growth are the greatest beneficiaries in economies with lower regulatory burdens. 
These two growth components, in turn, have played a prominent role in EU growth over 
the past two decades, thereby contributing to the sustainability of public finances.  

Bringing together all elements of the quality of public finances would make it possible to tap 
the  potential  synergies  across  the  main  instruments  of  EU  economic  policy  coordination, 
specifically  the  SGP  and  the  Strategy  for  Growth  and  Jobs.  Explicitly  or  implicitly,  the 
quality of public finances plays an important role in the implementation of both mechanisms. 
As regards the former, the quality of public finances is acknowledged in the reform of the 
Pact as deserving attention in the SCPs, and lack of progress in the area is viewed as a source 
of  weakness  in  implementing  the  preventive  arm.  As  regards  the  Strategy  for  Growth  and 
Jobs, quality of public finances is the explicit subject of one of the Integrated Guidelines that 
Member  States  are  expected  to  follow  in  their  reform  programmes,  but  a  comprehensive 
review of progress in this area has been lacking so far.5 Consequently, a more systematic and 
comprehensive  focus  on  the  quality  of  public  finances  can  foster  the  achievement  of  the 
goals  of  the  SGP  and  the  Lisbon  Strategy:  sustainability  of  public  finances  and  economic 
growth.  

IV. Greater focus on the quality of public finances in EU fiscal governance 

Considering  the  need  for  ensuring  sustainability  of  public  finances,  fostering  long-term 
economic growth and the smooth functioning of EMU, four areas for action can be identified 
to  improve  the  focus  on  the  quality  of  public  finances  in  the  EU  fiscal  surveillance 
framework  and  thereby  also  create  a  stronger  link  with  the  Strategy  for  Growth  and  Jobs. 
These  draw  on  the  broad  principles  laid  out  in  the  “EMU@10”  Communication  of  May 
2008. 

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Integrated  Guideline  No  3  of  the  Lisbon  Strategy  states:  “To  promote  a  growth-  and  employment-
orientated and efficient allocation of resources, Member States should, without prejudice to guidelines 
on  economic  stability  and  sustainability,  re-direct  the  composition  of  public  expenditure  towards 
growth-enhancing  categories  in  line  with  the  Lisbon  strategy,  adapt  tax  structures  to  strengthen 
growth  potential,  ensure  that  mechanisms  are  in  place  to  assess  the  relationship  between  public 
spending  and  the  achievement  of  policy  objectives,  and  ensure  the  overall  coherence  of  reform 
packages”. 

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IV.1  Gauging  the  quality  of  public  finances:  more  systematic  reporting  by  Member 
States and building up a set of indicators 

By  analogy  with  the  “traditional”  part  of  the  SGP,  analysing  Member  States’  quality  of 
public finances requires a solid and reliable set of information and indicators. In their annual 
updates of the SCPs, Member States are expected to present not only the projected path of 
major  fiscal  policy  variables  but  also  information  on  a  number  of  elements  related  to  the 
quality  of  public  finances,  e.g.  on  tax  reforms,  value-for-money  initiatives  and  changes  in 
national  fiscal  governance.  However,  a  review  of  the  current  reporting  practices,  based  on 
the  2006/07  and  2007/08  vintages  of  the  SCPs,  points  to  large  differences  across  EU 
Member  States  and  significant  deviations  from  the  formal  provisions6  that  set  out  the 
reporting requirements. This has also complicated the collection and tracking of comparable 
data on quality of public finances across Member States. 

Gauging the quality of public finance will benefit from: 

•  more  systematic  and  comprehensive  reporting,  in  the  context  of  the  SCPs,  on  issues 
related  to  the  quality  of  public  finances  and  provision  of  regular  information  about 
structural  reforms,  with  special  reference  to  restructuring  of  public  spending  and  tax 
reforms;  

•  the build-up of an inventory of indicators, in the context of the joint work programme of 
the Commission and the Economic Policy Committee, covering the different dimensions 
of quality of public finances across Member States and the development of a systematic 
approach aimed at assessing the efficiency of specific categories of public spending and 
gaining a better understanding of the determinants of efficiency. 

IV.2 Greater attention to efficiency and effectiveness of public spending  

The importance of efficiency and effectiveness of public spending is linked to the idea that 
the quality of public finances can simultaneously serve the sustainability of public finances 
and  economic  growth.  It  receives  further  confirmation  by  empirical  evidence  highlighting 
that,  while  the  relationship  between  the  level  of  government  spending  and  growth  is  not 
straightforward, a link becomes more evident between outcomes of public finance spending 
(e.g.  on  education,  health)  and  economic  performance.  One  promising  way  to  enhance  the 
efficiency  and  effectiveness  of  spending  is  to  set  up  or  improve  institutional  mechanisms 
aimed at establishing a stronger link between policy priorities and the allocation of resources 
and between resources and outcomes.  

Conducting budget reviews on a regular basis, including efficiency analysis, is instrumental 
for expenditure prioritisation. More generally, it is important that Member States move from 
purely  input-based  procedures  towards  procedures  that  take  into  account  performance 
information. 

IV.3 More efficient government revenue systems 

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The full name of the Code of Conduct is “Specifications on the implementation of the Stability and 
Growth Pact and Guidelines on the format and content of stability and convergence programmes”. It 
was endorsed by the Council in September 2005. 

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Government revenues are more than just the budgetary counterpart of expenditure since their 
structure and level impact on the efficiency of the economy, the distribution of income, and 
economic  growth.  A  review  of  the  current  structure  of  revenue  systems  and  the  main 
challenges for the design of tax systems, in particular the high tax burden on labour and the 
consequences  of  increased  economic  integration,  highlights  that  there  is  scope  for  shifting 
the tax burden from labour to other tax bases, but that these bases must be broad and stable. 

In  particular,  an  assessment  of  the  possibility  to  shift  the  tax  burden  from  labour  to 
consumption leads to the following conclusions: (i) tax shifting from labour to consumption 
can have positive but limited effects on employment and growth. These effects are mainly 
due to the widening of the tax base, which makes it possible to reduce tax rates and thereby 
distortions. (ii) The size of the positive effects depends largely on the adjustment of benefit 
levels. (iii) A coordinated approach in the euro area would produce a higher positive impact 
on  employment  and  growth  than  tax  shifting  measures  undertaken  unilaterally  by  any 
individual  euro-area  country,  whether  large  or  small.  (iv)  Potential  negative  impacts  on 
equity and intergenerational distribution issues need to be addressed. (v) And when shifting 
taxes from labour to consumption, attention should be given to its timing and the potential 
inflationary impact, also in relation to the position of the economy in the cycle.  

In  sum,  tax  reforms  should  continue  to  be  designed  so  as  to  foster  growth  and  minimise 
distortions, while playing also their role in addressing distributional concerns. This could be 
achieved  through  simple  rules  and  broad  tax  bases,  avoiding  loopholes,  inefficient  tax 
expenditures,  special  tax  regimes  and  unnecessary  exemptions.  Easing  the  high  tax  burden 
on  labour  by  shifting  to  other  tax  bases,  including  consumption,  can  be  an  element  in  this 
strategy, but it is a limited instrument for governments to react to short-run country-specific 
shocks  or  to  achieve  long-run  improvement  of  the  structural  conditions  for  increasing 
employment  and  growth  in  Europe.  A  comprehensive  strategy  to  revitalise  European 
economies,  including  by  modernising  the  social models, needs to rely on a comprehensive 
approach, using a wide set of policy instruments and a resolute implementation of structural 
reforms as indicated by the Strategy for Growth and Jobs. 

IV.4 Regular review of the quality of public finances 

The focus on the quality of public finances in the EU fiscal surveillance framework as well 
as its relevance for the Strategy for Growth and Jobs could be strengthened through a regular 
review of the quality of public finances in the Member States. The review would draw on the 
information provided in the SCPs and the inventory of quality of public finances indicators. 
Country-specific analyses could be further included in the review, in particular on selected 
thematic issues. Building on a tested method of collaboration, the review could be conducted 
jointly by the Economic Policy Committee and the Commission.  

* * * 

This  Communication  builds  on  the  2005  SGP  reform  to  suggest  avenues  for  strengthening 
the focus on the quality of public finances in the surveillance of national budgetary policies. 
They  concern  the  way  governments  formulate,  implement,  and  assess  their  budgetary 
strategies  over  the  medium  term,  and  how  the  preventive  arm  of  the  SGP  can  be  more 
effective in supporting the achievement of sustainable budgetary policies while contributing 
to  higher  growth  and  employment,  and  to  a  better  functioning  of  EMU.  Making  progress 

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with Member States along these lines can improve the effectiveness of EU economic policy 
coordination by helping to tap the potential synergies of its main instruments. 

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