The 2010 IREF summary and evaluation of fiscal and budgetary policies of European countries

The 2010 IREF summary and evaluation of fiscal and budgetary policies of European countries
For the fifth consecutive year, IREF (the European Institute for Research on Economic and Fiscal Issues) released its annual summary and evaluation of fiscal and budgetary policies adopted in 20 European countries in 2010.
As was the case in the previous years, the reports found no evidence of convergence among those policies. One obvious reason for this is that countries are not confronted with similar situations. While some, such as the Netherlands, Norway, Slovakia, Luxembourg, Germany, Sweden or Switzerland, are close to balancing their budgets, others, are more or less–and sometimes badly–in need for fiscal consolidation. The latter group of countries, those that must urgently reduce public deficit and public debt, forms a large majority. But divergences between fiscal policies can also be traced back to “ideologies”. If, today, almost no one among European leaders suggests that deficit and debt can safely be increased (a good point at last after many stimulus packages had to be swallowed in 2009!), only few believe that the present situation calls for a deep rethinking of the welfare state. Almost nowhere politicians behave as if the sovereign debt crisis was calling for a fundamental reorientation of economic policies.
Having made the choice to balance the budget and to restore growth by all means without introducing structural changes, we observe almost everywhere a mixed of various, predictable policies. More precisely, the tendencies are:
  • to lower or leave unchanged rates related to direct taxation (corporate and personal income taxation), but often with a broadening of the basis (getting rid of exemptions, tax-credits and the like),
  • to increase indirect taxes, starting with VAT and continuing with excises,
  • to increase top marginal income rate (because, it is wrongly argued, an increase of VAT harms more the low than the highest incomes) and…
  • to increase international cooperation between tax authorities.
Tax increases came into effect in Lithuania as of 2009. Even though lowering the tax rates would have aided an economic recovery, only the corporate income tax rate was reduced from 20 to 15 percent in 2010, while increased rates of VAT, excise duties and other taxes continued to be applied throughout the year.
Surely, many European governments hope that a strong economic recovery will bring the much-desired fiscal consolidation. This scenario is, however, problematic, firstly, because the general level of taxation will not allow for strong growth and, secondly, because the « social acquis » that make the welfare state require expenses that are likely to grow at least as fast as the economy.
In this respect, probably the best move of the year came from Slovakia. There, employees will from now on receive on their bank accounts not only their “regular wages” but also the social and health contributions that used to be paid by employers. Hence the wage received will be the total labor cost. Surely, this is a good way to prepare the ground for the much-needed reforms; making taxpayers aware of the costs and benefits of the prevailing system.
2011 is again a year full of uncertainty due, in particular, to the crisis of the euro-zone that is far from being over. Nonetheless, for decision makers that are convinced that to further postpone reforms is unwise, interesting ideas such as the one just mentioned can be drawn from those 20 reports.
IREF 2011 yearbook on Taxation in Europe is available on line. Those reports can be used all along the year for quick reference whenever mention is made of one of those twenty countries. The country profile cards, that have been added this year for the first time, should further facilitate such use of the yearbook.