EU NEW FISCAL AUTHORITY FOR WEAK MEMBER STATES

This paper focuses on setting up new fiscal authority to manage compatible fiscal decentralisation and budgetary discipline in the EU Member States. The authority need to adopt a tough fiscal consolidation programme. The authority should be responsible for designing fiscal policy for all Member States with stricter rules, conscientious monitoring and enforcement mechanisms for the conduct of fiscal decentralisation and budgetary policy. If Member States does not implement or violate the fiscal authority law that Member State/States to be sued in the European Court of Justice. We cannot grow our economy without proper fiscal cooperation between Member States. So the fiscal authority must coach at least weak Member States how to implement effective fiscal policy so that crony driven economy can be turned into a competitive market based economy. EU established the provisions of the Stability and Growth Pact (SGP) to avoid excessive deficits of the Member States and take precise action if essential to correct them. BUT SGP did not impose stricter rules, conscientious monitoring and enforcement mechanisms for Member States. As a result, some Member States such as Greece, Ireland, Portugal, Spain and Italy, there is a substantial risk of deficits and debts spiraling out of control, with disastrous consequences for the European economy. Moreover, the EU Member States are typified by the large assortment of political settings and intergovernmental relationships which instigate important differences in the way fiscal decentralisation and budgetary responsibilities are assigned between the levels of governments.  We cannot impose analogous fiscal rule to all Member States because it will affect the conduct of fiscal policy domestically through a greater decentralisation public finances. It is my judgement that strengthening our public finances and fiscal position the new fiscal authority would impose appropriate fiscal policy to weaker Member States who are currently not under EU rules of 3 percent budget deficit limit and 60 percent debt to GDP limit. When all EU Member States comes under EU rules we will impose analogous fiscal rule for all EU Member States.  

 

This paper addresses an appropriate balance between tax and expenditure adjustments of weaker Member States. A common tax system to all Member States at corporate and individual income and VAT levels may help authority to determine whose tax system fail to raise revenue but presently there are large assortment of economic settings in the Member States. So we cannot deploy common tax systems to all Member States now. But we can implement it in the future when all the Member States comes under EU fiscal law. I design the fiscal policy of weak Member States increasing taxes on such items with negative external effects like carbon dioxide, alcohol and tobacco and minimise taxes on corporate and income.  The increase in VAT can be good for Member States to alleviate debt problem but certainly the increase in VAT is bad for weak Member States. VAT increases didn’t hurt German economy in 2007 because German tax reform was combined with reduced payroll taxes for unemployment insurance and reduction in corporate income tax. In contrast, Greece increased VAT from 13 to 23 percent in order to receive an IMF-EU bailout package in 2010. It was too high. The damage done to Greece economy by the disastrous decision to increase VAT. As a result, higher VAT disappointed growth for Greece.  It is important to ensure that when we design fiscal policy it should not indexed to inflation. If any fiscal consolidation programme indexed to inflation, it will automatically erode much of the intended savings. When we increase taxes on weak Member States, it should not deform incentives to work. When we focus on expenditure cuts, it should not harm the socio-economically deprived groups. This paper analyse which public programmes and items should be reduced in order to reach the desired target. Spending cuts should account higher than increasing taxes. This would lead to larger proportion of savings. Some government spending that enhances growth and employment prospects such as education, Research and development should be preserved.  Social welfare and pension system should be designed to encourage people to work more. Expenditure cut focused largely on pensions, early retirement benefits, housing subsidies, social and unemployment insurance. Savings should be structurally sound. It should not target unnecessary key public investments such as road and railway maintenance. The new fiscal authority makes tough decisions during a period of fiscal retrenchment like wages should be adjusted for the productivity every year and funding should be limited so that it helps limit expenditure increases. This paper design an appropriate fiscal policy for weak Member States to ensure that it should not harm the growth of the weak Member States economy and it should be balance between the simplicity and revenue raising of weak Member States. 

This paper also addresses the labour market reform for weak Member States to strengthen our public finances so that we will be able to stabilise our economy. If we want to maintain the sustainable public finances, we should address the long term unemployment issue immediately because it inclines to drop out the labour force participation and become sluggish economy. This put increased pressure on social welfare systems and then public finances. The new fiscal authority tries to increase labour market participation of weak Member States which will lead to lower unemployment. This would generate higher tax revenues and puts less pressure on social welfare and public finances. This paper analyse how tax and spending reform of weak Member States affects the labour force participation in the course of fiscal consolidation. This paper recommends the new fiscal authority should encourage active labour market policy to safeguard labour force participation. It should discourage long term unemployment benefits, social security payments, early retirements when employee would be able to work more years. This would bring down the labour market related expenses. If employee works more, it leads to higher tax revenue and this would lead to robust public finances. Some government spending that enhances labour force participation such as subsidised child care programme, female work force participation should be preserved. The fiscal authority tries to reduce marginal tax rates for low and middle income group move out of the poverty trap.    

This paper also recommends the new fiscal authority must establish credibility with markets, global investors and public. The authority should be seen as trustworthy, transparency and honesty as committed to its fiscal consolidation. During the fiscal consolidation, forecasts should be accurate and realistic so that markets, global investors and public are not disappointed by the fiscal consolidation results. This would build confidence among them and this, in turn, will lower interest rates and borrowing costs of weak Member States.  

The main goal of this paper described about how new fiscal authority to design and implement efficient fiscal policy to the weak Member States. Delegation of fiscal policy to weak Member States may not be compatible fiscal decentralisation and budgetary discipline. So the new fiscal authority independently evaluates the Member States fiscal rules establishing limit for expenditures and deficit/debt. They need to be adapted to the country specific context fiscal rules. This would ultimately reduce deficit and public debt of weak Member States since new fiscal authority would be responsible for regular follow-ups of the attainment of the fiscal targets and fiscal sustainability calculations. This would turnout to be Europe’s biggest step forward to ensure fiscal consolidation and bring public finances back to sustainable path.