Get our budgets under control, or debt will control us

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of PLC.

Ahead of the economic and finance ministers today in Brussels (2 December), Economic and Monetary Affairs Commissioner Joaquín Almunia calls for public finances to be returned to a sustainable path in an op-ed sent to EURACTIV.

The following contribution was sent to EURACTIV by Economic and Monetary Affairs Commissioner Joaquín Almunia.

“On 2 December, European Union finance ministers will express their position on the Commission’s recommendations for reducing budget deficits in 13 of the member states. These recommendations firmly underpin the commitment by the EU’s leaders to continue to help return the economy to growth, but also include proposals to withdraw the special crisis measures, in particular the fiscal stimulus. 

This two-pronged strategy should see support measures remain in place in the EU throughout 2010, at the same time as drawing up clear and credible plans to reduce government deficits. This will enable us to support the economic recovery in the short term, secure in the knowledge that public finances will be put back on a sound and sustainable footing over the next few years. 

The EU’s average budget deficit is expected to be 6.9% of GDP in 2009 and to rise even further in 2010 before starting to fall slightly in 2011, which is when most of the stimulus measures are expected to come to an end. Government debt, meanwhile, is expected to be more than 20 percentage points higher in 2011 than it was in 2008, at nearly 84% of GDP. 

One of the major challenges for the coming years will be to get public finances back on a sustainable path. This is necessary to raise potential growth, which has suffered severe, long-term damage as a result of the crisis, and thus boost the economy and stem the growing tide of joblessness. Unemployment in the EU has risen from a low of 6.7% during the second quarter of 2008 to 9.2%, and is expected to exceed 10% in 2010. 

Restoring growth and consolidating public finances are two sides of the same coin. There can be no strong, balanced and sustainable growth of the kind Europeans and the G20 want to see if nothing is done to stop debt spiralling out of control. And deficits cannot be reduced unless we can identify new sources of economic activity and allow them to develop. 

There must be a clear, credible and coordinated approach to the consolidation of public finances in order to maintain confidence among households and economic agents, who will then be more inclined to consume and invest. 

The independent central banks will also need to have confidence in member states’ public finance plans if they are to maintain an accommodative monetary policy. 

Ultimately we face a stark choice. Either we get our budgets back under control, or our debts will control us. 

In some member states, financing the debt burden is already, or is about to become, the biggest item in the budget, bigger even than education or funding for research and innovation – the ‘virtuous triangle’ of knowledge which is the best way of generating productivity, international competitiveness and employment. 

Applying the Stability and Growth Pact will anchor expectations of a gradual return to sound finances. It will also enable us to release the public funds needed to promote innovative activities which have high growth potential and where the EU has a leading role, such as renewable energy sources. 

A ‘clear’ and ‘credible’ strategy means one which specifies not only how fast, but also by what means, the deficit will be curbed. In member states where public spending is already very high – more than 50% of national income – and where tax rates are also far above the OECD average, spending cuts will be key. 

But because of the hole in the budget created by the economic and financial crisis – government revenues will not return to their pre-crisis levels any time soon – cutting spending will in many cases not be enough. 

In any case, whatever the strategy pursued, there must be protection for the most disadvantaged groups in society and those exposed to the crisis and to international competition in the form of active training and employment policies: temporary job-shedding must not be allowed to turn into long-term unemployment. 

These are not easy choices. But to restore confidence in the short term and to put growth firmly back on the rails, we need to secure our medium- to long-term prospects. We must do more and better with the same level of spending, and we know that this is possible. We know for example that different member states spending a similar amount achieve different results in education. 

I firmly believe that the budgetary adjustment paths proposed by the Commission at the beginning of November, and now on the table for discussion by finance ministers, are appropriate. 

They strike the right balance between ambition and realism, while taking account of national budgetary starting positions and margins for manoeuvre. 

They will allow some member states to continue to drive growth, while others focus on consolidation. The recommendations, together with a wider strategy for economic growth and reform, are a crucial element in the coordination of economic policies in the common interest of the citizens of Europe.