CELEX: 31977D0492
Language: en
Date: 1977-07-25 00:00:00
Title: Council Decision of 25 July 1977 on the preparation of public budget for 1978

No L 204/6                         Official Journal of the European Communities                    10. 8 . 77
                                                            II
                                      (Acts whose publication is not obligatory)
                                                    COUNCIL
                                                  COUNCIL DECISION
                                                    of 25 July 1977
                                on the preparation of public budgets for 1978
                                                      (77/492/ EEC)
           THE COUNCIL OF THE EUROPEAN COMMUNITIES,
           Having regard to the Treaty establishing the European Economic Community,
           Having regard to Council Decision 74/ 120/ EEC of 18 February 1974 on the attainment
           of a high degree of convergence of the economic policies of the Member States of the
           European Economic Community ( ! ), and in particular Articles 1 and 3 thereof,
           Having regard to the proposal from the Commission ,
           Whereas the Council agrees with the analysis of the economic situation contained in the
           Commission communication of 7 July 1977 concerning, in particular, the preparation of
           public budgets for 1978 ,
           HAS ADOPTED THIS DECISION :
                                                        Article 1
           Member States shall pursue economic policies complying with the guidelines on the prep­
           aration of public budgets for 1978 set out in the Annex.
                                                         Article 2
           This Decision is addressed to the Member States .
           Done at Brussels, 25 July 1977.
                                                                         For the Council
                                                                          The President
                                                                           H. SIMONET
           (') OJ No L 63 , 5 . 3 . 1974, p. 16 .
 ---pagebreak---  10 . 8 . 77                          Official Journal of the European Communities                              No L 204/7
                                                            ANNEX
                            GUIDELINES FOR ECONOMIC POLICY IN THE COMMUNITY
                   1 . General guidelines                              provided for, indeed, in the guidelines of
                                                                       November 1976 and March 1977 for economic
                                                                       policy in the Community in 1977.
 1.1 . As insufficient progress has been made with the
       process of rationalization undertaken by the coun­
       tries of the Community, the growth and employ­            1.3 . All the Member States should try to re-establish
       ment objectives adopted in the context of the                   or improve conditions conducive to a return to
       economic policy guidelines established in March                 sustained and non-inflationary growth, encou­
       1977 and in the fourth medium-term economic                     raging, in particular, the propensity to invest of
       policy programme ( J ) are hardly capable of                    the private sector and assuring an adequate level
       achievement for the Community as a whole . The                  of public investment. To achieve a healthy and
       economic policies conducted by the Member                       lasting recovery in investment, the reduction in
       States having an external surplus and those of                  the rate of increase of wage costs, both direct and
       deficit Member States have not yet produced all                 indirect,  of   the   last  few   months    needs   to
       of their expected results. The process of adjust­               continue, but in general it must be accompanied
       ment which has begun and the structural                         by policies to reduce inequalities. At the same
       changes by which it is inevitably accompanied                   time, specific action, both at national and
       are occurring slowly and their magnitude has not                Community level, should be such as to favour the
       yet, moreover, been fully appreciated. Neverthe­                recovery in investment in the context of a
       less, impatience is no more appropriate than                    Community structural policy. The Community
       resignation or pessimism when it relates to the                 could contribute to this by strengthening existing
       major distortions which have emerged, over a                    Community instruments, thereby increasing the
       number of years, in the world economy under                     multiplier effect. Thus, for example, an increase
       the influence, notably, of accelerated inflation                in the capital of the EIB has been envisaged and
       and the oil crisis . These structural difficulties can          a better use of the means of action of the Social
       be overcome only gradually by putting into                      Fund, a broadening and diversification of the
       action the policies foreseen in the fourth                      activities of the Regional Fund and a mobiliza­
                                                                       tion   of  increased    financial  resources  in  the
       medium-term economic policy programme of
       the Community.                                                  energy sector can all be anticipated. In addition,
                                                                       the Commission has proposed that new Commu­
                                                                       nity borrowing machinery be created to finance
                                                                       investment of a structural character in line with
 1.2. It would then be a mistake to abandon efforts to
       control demand and to coordinate it at Commu­                   priority Community objectives in the areas of
       nity level on the grounds that, up to the present,              energy, industries undergoing structural change
       the objectives sought have not always been fully                and infrastructures. This proposal is currently
                                                                       under study.
       attained. The disparity of economic situations
       within the Community implies, in order to main­
       tain an adequate rate of growth in those Member           1.4 . Public intervention is not sufficient to overcome
       States where the primary policy objective is to                 the difficulties of adaptation which will arise in
       remove inflation and the external deficit, that
                                                                       coming years and to restore confidence in the
       expansion should continue, and probably accel­                  medium-term outlook .
       erate, in those countries where the balance of
       payments is currently satisfactory. But, on the
       other hand, expansion in the latter countries is                A minimum economic and social consensus on
       partly dependent upon the success of anti-infla­                objectives to be achieved and the instruments to
       tionary policies in the former, since the persist­              be used is more than ever necessary.
       ence of sizeable divergences in the rate of price
       increases is likely to create new uncertainties
       especially about the medium-term development                    The third meeting between the social partners,
       of export markets and therefore to influence                    the Governments of the Member States and the
       investor's decisions. It is more than ever required             Commission on 27 June 1977 confirmed the
       that a differentiated regulation of domestic                    scale of the tasks to be carried out and of the diffi­
       demand, as between the surplus countries and                    culties to be solved . The measures which have
       the deficit countries, should be sustained , as                 already been taken in all the Member States in
                                                                       connection with employment and professional
(M OJ No L 101 , 25 . 4 . 1977, p. 2.                                  training, particularly that of young people and
 ---pagebreak---  No L 204/8                           Official Journal of the European Communities                                10 . 8 . 77
        women, ought to be strengthened to the greatest              Some strengthening of measures taken to stimu­
        extent possible.                                             late investment is necessary in order to recover
                                                                     lost ground as far as meeting medium-term
                                                                     targets is concerned and to accelerate the return
                                                                     to full employment. Some Member States have
               2. Monetary policy guidelines                         already adopted this approach.
2.1 . Monetary policy has a major contribution to
        make in consolidating or strengthening the              3.2. As far as private investment is concerned, deci­
        success achieved in the fight against inflation.             sions might be made where appropriate, for
        The pursuit of a steady monetary policy and the              example, to :
        publication of quantified guidelines for the rele­
        vant monetary aggregates in each Member State
        will help to reduce inflationary expectations, to            — enlarge the possibilities of fiscal evaluation of
        strengthen the confidence of management and                        company liabilities and assets ;
        private consumers and favour the development of
        a more stable pattern of exchange rates between              — increase subsidies for research and develop­
        the currencies of Member States. In its annual                     ment ;
        report on the economic situation in the Commu­
        nity (J) the Commission has already outlined                 — pay selective subsidies favouring investment
        quantitative guidelines for monetary policy in the                 designed to create new energy sources or to
        Member States for 1977, but target figures were                    save energy, to improve the environment and
        indicated for some Member States only.                             to refurbish regional infrastructures.
        According to the fourth medium-term economic
        policy programme for the Community, guide­
        lines for internal monetary policy should be esta­           In order to harmonize such action and to avoid
        blished at a Community level each year. The                  creating distortions between the Member States,
        Commission will again formulate quantitative                 all investment-incentive programmes should be
        monetary policy guidelines in its forthcoming                the subject of coordination at Community level.
        annual report on the economic situation in the
        Community. The quantitative guidelines will
        have to take account of fairly divergent economic       3.3. An increase in direct investment by public author­
        situations and the differing monetary instruments            ities, whether central or local, is also recom­
        of the Member States and the extent to which the
                                                                     mended for most countries, within the limits of
        Member States' economies are open towards                    non-inflationary financing possibilities and
        foreign countries.                                           taking account of the existing structure of
                                                                     interest rates. The importance and impact of this
2.2. Data available for 1977 (covering, for most coun­               increase will differ from one country to another,
        tries, only the first quarter) appear to indicate a          according to public investment needs and the
        slow deceleration of monetary growth, but special            degree of spare capacity existing in the construc­
        vigilance is still required in certain Member                tion industry. Specific programmes to be drawn
        States, especially in Italy. In Denmark, France              up should take this into account. In certain
        and the Netherlands it would appear necessary to             Member States the main aim of such measures
        maintain the measures taken to limit the expan­              would be to strengthen overall demand trends,
        sion of bank credit. On the other hand, in the               while in others these measures would be aimed
        United Kingdom, where monetary growth has                    more at improving the economic and social
        fluctuated widely in the past, a steadier and more           infrastructure .
        sustained expansion of the money supply seems
        feasible and desirable. In the Federal Republic of
        Germany, the trend of central bank money was                 In order to attain these objectives, planning
        largely consistent with the guidelines during the            should now begin in most Member States to raise
        first four months of 1977 .
                                                                     the volume of general government investment
                                                                     above that of recent years without, however,
                                                                     raising the proportion of public expenditure in
                                                                     GDP. The announcement of the implementation
    3 . Budgetary and financial policy guidelines
                                                                     of new programmes could well strengthen confi­
                                                                     dence without producing undesirable 'mechan­
3.1 . More than in the past budgetary policy should                  ical' effects if, as is the case in certain countries,
        now be used as an instrument of growth policy.               unused production capacities are fairly substan­
                                                                     tial . Integrating such efforts into the five-year
(') OJ No L 358 , 29 . 12. 1976, p. 1 .                              public investment programmes, covered by
 ---pagebreak--- 10. 8 . 77                           Official Journal of the European Communities                           No L 204/9
      Council Directive 74/ 121 /EEC of 18 February                  investment and private consumption . Accord­
      1974 on stability, growth and full employment in               ingly, imports could be more dynamic and,
      the Community (*), should increase the chances                 despite an appreciable performance of exports,
      of achieving a more stable long-term growth.                   the current balance should only improve slightly.
                                                                     Unemployment is likely to increase further.
3.4. Action taken to revive investment using the                     Owing to the moderation of import prices and
      means described above implies a prolongation of                wage costs the inflation rate will be cut consider­
      efforts to reduce budget deficits in the surplus               ably.
      countries. Nevertheless, stimulatory action should
      not bring about, in the longer term, any lasting
      deterioration in the net borrowing requirement.                Given the size of the external deficit and the
      Where     the  weakness    of   investment    reflects
      general under-utilization of productive capacity               growing external debt burden which reduces the
                                                                     authorities'   room    for  manoeuvre,    economic
      and entails the risk of persistent reduction or
      obsolescence of capacity, a deterioration in the               policy should, as a priority, be geared towards
      budget surplus or deficit would be acceptable.                 creating lasting conditions for a return to external
                                                                     equilibrium without which the employment situa­
      The    favourable effects   this should     have on
                                                                     tion can only grow worse.
      economic growth should in time engender addi­
      tional tax revenue which in its turn should tend
      to reverse the effect on the budget deficit.                   The incomes policy adopted in the spring of
                                                                      1977 could contribute to the attainment of this
      Those Member States whose balance of payments                  objective in so far as the salary guidelines, which
      may still be precarious in 1978 or who require a               imply a modest growth in real terms in 1978, are
      current surplus in order to repay external debt                strictly adhered to. It should be accompanied by
      should modulate very carefully the measures                    budget measures which, ranged around a policy
      taken to stimulate investment, which should not,               to reduce the net borrowing requirement of the
      in any event, bring about a growth in budget defi­             public sector, could nevertheless permit certain
      cits or of the monetary aggregates in excess of                investment incentives. This development would
      the limits agreed within the Community context                 be even more desirable since the maintenance of
      or with the International Monetary Fund.                       the high interest rates, necessary to finance the
                                                                     external deficit, could have a negative impact on
      In those countries whose budget deficit is being               the propensity to invest. If the salary norms were
      financed to a substantial degree by monetary                   to be exceeded, the restrictive orientation of
      means in 1977, action to get investment moving                 budgetary policy would have to be reinforced ; in
      again should be carefully monitored to prevent                 particular it would be appropriate to have
      the creation of new liquidity from strengthening               recourse to an increase in indirect taxation in
      inflationary expectations.                                     such a way as to maintain private consumption,
                                                                     and consequently imports, at a level compatible
                                                                     with the balance of payments, which must be
           4. Guidelines country by country                          regarded as the principal objective.
4.1 . In Denmark, the economy has entered into a
      phase of very slow growth since the autumn of             4.2. In the Federal Republic of Germany, the
       1976 brought about by a restrictive policy made               upswing, which has been more restrained than in
       necessary by a deterioration in the current                    previous expansionary phases, is not sufficiently
      balance of payments. Private consumption has                   strong. Taking into account the relative lack of
      scarcely risen at all and total investment                      dynamism of economic activity, in the area of
      (construction and machinery) has experienced a                  private-sector investment in particular, growth
       quite marked decline. Industrial exports are the              will be insufficient to improve the labour market
       main element supporting activity which remains,                situation substantially.
       however, insufficient to prevent an increase in
       unemployment. These trends should persist until
       the end of 1977 and, as a result of a fall in
       imports, should permit a reduction in the current              Owing to the slow rate of growth, efforts to cut
       deficit.                                                       the public deficit should be spread over a larger
                                                                      period than foreseen . There may in fact be a
      The outlook for 1978 is for a certain pick-up of                need for the public budgets to exert an expan­
       the economy as a result of a modest recovery of                sionary influence on the economy. The amended
                                                                      tax bill tabled by the Government and now
(•) OJ No L 63, 5. 3 . 1974, p. 19 .                                  under examination by Parliament is along these
 ---pagebreak--- No L 204/ 10                        Official Journal of the European Communities                              10. 8 . 77
      lines. Under the bill, while the standard VAT rate            in the form now adopted shows a deficit of FF
      is to go up from 11 % to 12 % and the reduced                 1 1 800 million, could close with a deficit similar
      rate — applying principally to foodstuffs and                 to that of 1976. However, the greater part of this
      services — from 5-5 % to 6 % , child benefits are             deficit will be financed by non-monetary means.
      to be increased, certain basic allowances under               In addition, the authorities have for the first time
      income and wage tax raised and some relief                    fixed a goal for money supply growth for 1977
      granted in respect of corporation and wealth tax.             while maintaining control over the increase in
      This package is likely to provide an initial                  the greater part of bank lending. Compliance
      stimulus of some DM 1 000 million in 1978 .                   with these guidelines throughout the current year
      Should the impact of these measures, together                 will make a valuable contribution to the general
      with those adopted earlier (the annual shares of              fight against price and cost inflation.
      the multinannual public investment programme,
      the measures aiding public housing and the
      specific programme to maintain employment) is                 The efforts to restore equilibrium should be con­
      inadequate to restore domestic demand, new                    tinued in 1978 and, in particular, the more
      stimuli should be applied, particularly with a                restrained growth of costs seen in 1977 should
      view to the long-term strengthening of the                    continue. Economic policy, both monetary and
       propensity to invest.                                        budgetary, should aid in this direction. As care
                                                                    should be taken to avoid any sharp acceleration
                                                                     in the growth of demand as this would be likely
       Despite the more expansionary nature of the                   to generate an excessive increase in imports, the
       overall budget, continued efforts should be made             growth in State expenditure should therefore not
       to curb the growth of current expenditure,                    be allowed to exceed the increase in output in
       thereby making room for capital expenditure.                 value terms though spending should be timed to
                                                                     take account of the short-term economic situa­
                                                                     tion. Thus investment in building and construc­
                                                                     tion, which has a low import content but an
       Thanks to their improved earnings, local authori­             appreciable effect on employment, might be
       ties should be able to increase their investment
                                                                     stepped up to help sustain employment. But in
       expenditure .                                                 any event a return to budget equilibrium, which
                                                                     should remain the longer-term objective, should
                                                                     not necessarily be sought in 1978 .
       On the monetary side, the Bundesbank should
       continue its present policy of expanding the
       money supply in line with potential growth and          4.4. In Ireland, developments in the second half of
       a further slackening in the rate of price increases.           1977 should be reflected in a marginally higher
       Monetary policy should continue to be applied                 growth rate due to a more sustained performance
       flexibly so as to avoid temporary strains on the              of exports, private consumption and investment,
        money and capital markets.                                    resulting in a small decrease in unemployment,
                                                                     which will still, however, remain at an historically
                                                                      high level at the end of the year. Consumer
4.3 . In France, where the rate of growth of wage costs               prices will moderate and the balance of payments
                                                                      deficit will continue to widen but at a slower
        has slowed down since the beginning of the year,
        the economic activity, which is mainly                        pace .
        export-led, will remain moderate between now
        and the end of 1977 . The external deficit will
        shrink further and the terms of trade will go on              In 1978 these trends should continue, unemploy­
        improving. The upward movement of prices will                 ment should fall again moderately and the rate of
        tend to slacken gradually from the second half of             increase in prices slow down further.
        1977. In 1978 , a progressive revival of domestic
        demand should lead to some quickening in the
        rate of growth . Even so, the situation of the                The 1977 budget is likely to have a more stimula­
        labour market will experience only a slow                     tory effect than initially expected. The net
        improvement.                                                  borrowing requirement as a percentage of gross
                                                                      domestic product should nevertheless be of the
                                                                      same order of magnitude as last year (1 1 -5 %).
        The economic policy laid down for 1977 is
        aimed at securing a decisive slowdown in the
        inflation rate so as to make substantial progress             The budget for 1978 should be prepared in accor­
        towards restoring equilibrium in the main macro­              dance with the Council Decision of 15 March
        economic relationships. The State budget, which                1976 laying down the economic policy condi­
 ---pagebreak---  10 . 8 . 77                         Official Journal of the European Communities                          No L 204/ 11
       tions to be observed by Ireland (*) in connection            a result of an increase — already implemented
       with the Community loan, and taking account of               — in certain tax rates and the introduction of a
       the progress made in 1976 and 1977 in reducing               new system of advance tax on non-wage incomes.
       the borrowing requirement.                                   However, additional measures will probably prove
                                                                    necessary to comply with the limit of Lit
                                                                     1 6 450 000 million laid down by the Council in
       Attention must accordingly be paid to the neces­             May. Further efforts will also have to be made to
       sity of not increasing tax pressure on wage                  keep to the limit of Lit 14 450 000 million for
       incomes, due to incomes policy considerations,                1978 . This is because revenue growth must be
       and of making an additional budgetary effort in              expected to decelerate sharply now that tax arran­
       favour of investment and employment. It would                gements are reverting to normal and incomes in
       be desirable if an attempt could be made to make             money terms expanding a lot less rapidly.
       savings in non-priority current expenditure and              Consequently, the growth in public expenditure,
       to enlarge the tax base on certain incomes,                  and more particularly that in current expenditure,
       notably agricultural incomes. In addition, the               should be kept within strict limits, leaving no
       cost of food subsidies also constitutes a burden to          room for any increase in real terms. There will
       the Exchequer and their phasing out could be                 also be a need to secure additional revenue,
       envisaged when the consumer price index shows                among other things through a further adjustment
       a deceleration .                                             of public service charges and an increase of local
                                                                    taxes. The reform of the system of financing
                                                                    social security benefits which the Government
       As far as incomes policy is concerned, a continua­           has undertaken to carry out by 31 January 1978
       tion of a moderate pay agreement for 1978 is                 should result in a better distribution of the tax
       imperative as it will improve the prospects for              burden on various types of economic transaction.
       the development of employment and reduce the                 It should also provide an opportunity for step­
       risk to the balance of payments of too rapid an              ping up the fight against tax avoidance.
       expansion in private consumption .
       To obtain at the same time a moderate expansion              Domestic credit expansion was much larger
       of monetary aggregates and a satisfactory perfor­            during the first quarter of 1977 than had been
       mance of bank lending to the private sector, the             estimated in April for this period ; this was due
       authorities should endeavour to finance as much
                                                                    to the repayment of external trade debts
       as possible of the public deficit by non-monetary            following the abolition of the bankers' deposit
       means and encourage the development of the                   and the tax on currency purchases. The Commu­
       'non-monetary liabilities' of the banking system .           nity and international undertakings given on this
                                                                    score for 1977 and 1978 must be strictly
                                                                    complied with by the monetary authorities,
4.5. In Italy, industrial production, particularly                  failing which the stabilization programme would
       because of the stabilization measures adopted in             be liable to lose most of its effectiveness . If neces­
       the autumn of 1976, weakened in the first                    sary, the ceiling controls on bank lending will
       months of the year. The continued high rate of               have to be tightened and extended once more.
       inflation slackened, though only little. At the              Interest rates should be kept relatively high,
       same time, the deficit on the overall balance of             while simultaneously endeavouring to improve
       payments for the first four months of the year               their structure .
       was slightly smaller than a year earlier. The lira
       exchange rate remained fairly stable thanks to a
       substantial increase in the commercial banks'
       short-term external indebtedness, and to a rapid
       improvement in May and June in the balance of                Lastly, fresh efforts will have to be made to
       payments on a settlements basis. The authorities             contain the rise in labour costs per unit of
      should ensure that economic growth, which                     output. Success in this field will help to slow
       might reach 3 % in 1977, is obtained under                   down inflation, to improve the competitive posi­
       conditions which are compatible with the objec­              tion of the Italian economy and to support the
       tives for 1977 and 1978 agreed among the terms               level of employment.
       for the grant of the Community loan .
       In the public finance field, the public sector          4.6. In the Netherlands, following sluggish growth
      deficit will shrink significantly in 1977, mainly as          and an increase in unemployment in the first
                                                                    half-year, the economy should pick up somewhat
(') OJ No L 77, 24. 3 . 1976, p. 15.                                in the second half of 1977 and in 1978 , although
 ---pagebreak--- No L 204/ 12                       Official Journal of the European Communities                                10 . 8 . 77
     this is unlikely to produce a rise in employment.              allowed by the budget, by abolishing VAT on
     The balance of current payments surplus may                    investments and making full use of the scope
     well remain at the same level, if not increase.                offered by the existing laws on economic expan­
                                                                    sion . Care should be taken to avoid an additional
                                                                    increase in public investment, given the narrow
     The authorities should continue a policy aimed                 margin of spare capacity in the public works
     at medium-term targets of reducing unemploy­                   sector. There should be a gradual shift in the
     ment by means of stimulating private invest­                   public investment programmes towards activities
     ments, the rise in costs and prices and restraining            which focus more on the quality of life ; this shift
     the growth of the public sector and of the collec­             would also contribute to the required moderation
     tive   burden   in  relation to  GNP.     Short-term           in the growth of current expenditure, which is
     problems must be considered within this medi­                  essential if a rapid increase in the tax burden is
     um-term framework.                                             to be avoided. The government budget for 1978
                                                                    should therefore be aimed at a redeployment of
                                                                    the present budgetary resources with a view to
     Since the outlook for employment and activity in               holding to borrowing requirement as a percen­
     1978 is not particularly favourable, it would be               tage of GDP to the level reached in 1977.
     inappropriate to give budget policy a restrictive
     bias. However, given the medium-term objectives,
     the general government borrowing requirement                   In view of the resources available on the capital
     as a proportion of gross domestic product should               market, the greatest possible proportion of the
     remain close to the level reached in 1977 .
                                                                    budget deficit should be financed through long-
                                                                    term loans on the national market. Monetary
                                                                    policy should restrict the rate of growth of private
     Since unemployment cannot be reduced unless                    sector short-term credit to the expected rate of
     there is a relatively large external surplus,                  growth in the gross domestic product in money
     economic policy must continue to provide room                  terms so as to reduce the danger of excess
     for substantial exports of long-term capital,                  liquidity causing inflationary tendencies to get
     which — given the present outlook — should                     out of hand .
     hardly be an impediment to meeting the general
     government financing requirements. In any case,
     there is a special need to check the growth of           4.8 . In Luxembourg, the economic situation is still
     domestic liquidity so as to avoid any increase in
                                                                    sluggish and the outlook for the second half of
     the ratio between domestic liquidity and national
     income .
                                                                     1977 and for 1978 holds out only little hope of a
                                                                    revival in activity. Even so the public finance situ­
                                                                    ation is more favourable than expected.
4.7. In Belgium, in the first half of 1977, unemploy­
     ment, particularly among women, rose once
     again, the upward movement of consumer prices                   In preparing the Government budget for 1978 ,
                                                                    account had      to be taken     of the   imbalances
     slowed down and foreign trade remained in satis­
     factory balance. In the months ahead and in                    affecting the employment market. In order to
                                                                    counter    these    imbalances   and   to   stimulate
      1978 the overall economic growth will probably
     still be too moderate to produce any significant               economic growth, the Government adopted, in
      improvement on the labour market. On the other                conjunction with both sides of industry, a plan to
      hand, progress made in slowing down the rates of               maintain economic growth and full employment.
     inflation remain precarious. Economic policy                   Such a policy stance is compatible with mainte­
     should therefore continue to combat both unem­                  nance of government net lending at a level of
      ployment and inflation , within the limits set by             over Flux 2 000 million and holding general
      the difficult public finance situation .                      government net borrowing, expressed as a propor­
                                                                     tion of GDP, to the same level as in 1977 (1 %).
     The constraints imposed by the pronounced
      public finance disequilibrium — a disequili­            4.9 . The present outlook for the United Kingdom
      brium which is untenable in the medium term                   economy is sensitive to the wide range of
     — would leave no room for implementing an                       possible outturns for earnings after stage II
      economic policy designed to stimulate activity                 expires at the end of July 1977. Until the details
      and employment through overall budgetary                       of the next wage agreement are known, it must
      measures .   The   Government    should    therefore           be feared that average earnings could well accel­
      pursue a selective and temporary policy of                     erate beyond the Government's target of about
      combating unemployment ; it should stimulate                   10 % for the twelve months from August 1977.
      business investment, notably, where in so far as               If this happens, a temporary acceleration in
 ---pagebreak--- 10 . 8 . 77                         Official Journal of the European Communities                         No L 204/ 13
      demand is foreseen . However, by late 1978                   to the IMF without increasing the tax pressure
      economic growth will have weakened and infla­                significantly. However, domestic credit expansion
      tion may accelerate.                                         (DCE) is likely to be close to the permitted
                                                                   ceiling.
      The forecast is for an increase in gross domestic
      product (GDP) of about 3 % from 1977 to 1978 .               If the growth in average earnings exceeds the
      As much as 1 % of this growth in GDP will be                 Government's targets then the problems facing
      accounted for by increased production of North               the United Kingdom Government, when consid­
      Sea oil. The rate of inflation is expected to fall           ering budgetary policy for 1978/79, will be that :
      markedly in the outlook period ; in the final                — after reaching a low point in the second half
      quarter of 1978 , however, the increase over a year              of 1978, the rate of inflation may begin to
      earlier may still be more than 10 % if the                       rise once more ;
      Government's target with respect to earnings is              — the rate of economic growth may not be suffi­
      exceeded . The combined effect of this slowdown                  cient to avoid a fall in capacity utilization and
      in prices and acceleration in earnings could be a                a further rise in unemployment ;
      strong revival of private consumption . Total gross          — the balance of demand between consumption
      fixed asset formation will also show an increase                 and investment may deteriorate ;
      from 1977 to 1978, albeit at a lower rate than for           — pressures could well arise to use the room for
      private consumption . Strong growth in private                   manoeuvre provided by the projected balance
      sector fixed asset formation (especially in manu­                of payments surplus to stimulate private
      facturing industry) will be partly offset by a                   consumption.
      further substantial decline in public sector invest­
      ment. There is likely to be little change in public          Despite the strong possibility that economic
      authorities' current consumption . On the external           expansion may slow down, no fiscal or monetary
      side, there should be a continued and rapid                  relaxation can be countenanced given the threat
      expansion in net exports, because of the contribu­           posed to the UK economy by the possibility of a
      tion of North Sea oil, pointing to a current                 further surge in inflation . However, should the
                                                                   authorities still see room for manoeuvre without
      account surplus of over £ 1 000 million in 1978 .
                                                                   exceeding the target given to the IMF (a PSBR of
      The present developments of the budgetary aggre­             £ 8 600 million the equivalent of 5-5 % of GDP),
      gates suggest that the public sector borrowing               action should be directed towards a lasting
      requirement (PSBR) for 1978/79 should remain                 increase in investment and employment and a
      within the figure indicated in the Letter of Intent          progressive reduction in the inflation rate.