EU exec to urge sharp economy boost - draft
The European Commission will call on Wednesday for tax cuts and lower interest rates to haul Europe out of recession, despite national differences on how to tackle the slowdown.
A draft Commission proposal obtained by Reuters did not set the overall volume of the stimulus plan, but the leaders of France and Germany called for measures totalling 1 percent of the bloc's total output, or 130 billion euros ($164 billion).
In a joint article to appear in France's Le Figaro daily and Germany's Frankfurter Allgemeine Zeitung, Nicolas Sarkozy and Angela Merkel said the 1 percent figure was a "good target" for national governments to match if they could.
But Dutch Finance Minister Wouter Bos raised doubts about the need for governments to go on a spending spree and the Commission to encourage them.
"It's much more important that they set guidelines, for example that we don't stimulate industry in one country at the expense of industry in another country," he said.
Aiming to bridge such differences, the Commission document gives national governments leeway on policies throughout.
"Only through a significant stimulus package can Europe counter the expected downward trend in demand, with its negative knock-on effects on investment and employment," the draft said.
The Commission said the stimulus had to be timely, targeted and temporary, mix revenue and spending instruments, be accompanied by structural reforms and comply with European Union budget rules -- the Stability and Growth Pact.
The text, which EU leaders will discuss at a summit in December, made clear the rise in budget deficits resulting from the stimulus should be repaired as soon as the economy picks up.
"This budgetary stimulus should be foreseen for a maximum period of two years (2009-2010), following which member states' budgets should commit to reverse the budgetary deterioration and return to the aim set out in the medium-term objectives," it said of the goal of balanced budgets for most countries.
HIGHER DEFICITS
The fiscal stimulus, along with the fall in revenue and rise in spending that accompany an economic slowdown, is likely to boost deficits in France, Britain, Ireland, Italy, Greece and Portugal to well beyond the EU ceiling of 3 percent of GDP.
"Member states may be obliged to break the 3 percent reference value in 2009 and 2010 because of the extraordinary circumstances," the draft said.
"However, such excessive deficits will have to be corrected in time frames consistent with the recovery of the economy."
In rare explicit comment by the Commission on interest rates -- the domain of the European Central Bank -- the draft argued that the ECB had further room to ease monetary policy. The bank has signalled it may cut rates on Dec. 4, and markets expect a 50-75 basis point cut from the current 3.25 percent.
"Emerging evidence of lower inflationary pressures in the face of slumping demand provides scope for further reductions in interest rates," the draft said.
The Commission proposals will form the basis of what could be a tough debate among EU leaders at a Dec. 11-12 summit over what form the bloc's action will finally take, with differences apparent on issues such as whether to cut value-added tax (VAT).
Some countries do not want to boost their budget deficits, such as Poland which must keep its shortfall below 3 percent of GDP to qualify to join the euro zone one day.
"I don't think reducing VAT in Poland is an option next year. Next year Poland is cutting (other) taxes and has also decided to cut its budget deficit," deputy Polish Finance Minister Ludwik Kotecki told Reuters.
Britain on Monday announced a 2.5 percentage point cut in VAT to 15 percent, part of a plan to pump 20 billion pounds ($30.2 billion) into the economy. Germany and France said they would not copy it.
The draft suggested temporarily increased benefits to low-income households and the unemployed, or a temporary lengthening of benefit pay-outs, as possible measures.
It said a temporary, across-the-board VAT cut could also boost consumption, but did not propose a coordinated cut for the whole 27-nation bloc.
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Nigel Lawrence
Nov 25th 2008, 20:15
@ Karl Abela
Reducing VAT in Malta will not work. Prices will not go down. Our businesses in Malta are so greedy that they will not reflect the VAT decrease but they will rather net it into their own pockets------------ This statement- BANG ON TARGET
Robert Scullion
Nov 25th 2008, 19:23
to keep things in perspective
the Irish Gov has announced a 0.5% increase to VAT, higher hospital charges, higher doctors charges, a 1% income levy on all income, cutbacks in lots of essential services (including education)
be thankful you're not living in Ireland at the moment
I Abela
Nov 25th 2008, 18:50
@ Karl Abela - As usual your comments make everybody laugh at you. Why do you insist on riducling yourself trying to defend PN. Admit it, once you touch peoples' pockets, there is no turning back, no matter how much you ridicule yourself. How many people do you know who only eat a dozen eggs a year? Because the people I know spend at least Lm100/month at the supermarket, Lm40-Lm50/month on fuel, Lm10/month on their mobile, Lm10/month on their internet connection, Lm13/month for cable TV and a lot more Lm's/month. Beleive me people will be saving a lot more than 1.9c. Also VAT reductions should complement other incentives which the PN knows nothing about, such as TAX reductions, lower utility tariffs to reflect current oil prices, etc. etc. But if you read the article carefully, there is written that smaller states (guess who might that be?) cannot afford such measures. Maybe you would be so kind to enlighten us all as to what happened to our FINANZI FIS-SOD Mr. Abela ?
Byron Camilleri
Nov 25th 2008, 16:55
Are we sure we are part of the EU? A complete different apprach is taken oin Malta!
Muscat.Pat
Nov 25th 2008, 15:36
The UK government would not be increasing corporate tax as previously planned before the financial calamity; instead it is leaving it flat whilst decreasing the tax for small business. And in Malta? Nikkrepaw!
Karl Abela
Nov 25th 2008, 15:26
People lets make our Math before we arrive to conclusions.
Reducing VAT in Malta will not work. Prices will not go down. Our businesses in Malta are so greedy that they will not reflect the VAT decrease but they will rather net it into their own pockets. Whatever people may say, it is impossible to ensure that all prices go down and we will end up subsidizing the businessmen....as if we didnt have enough people to subsidize on this blessed island.
Besides, a VAT decrease of 2% will have absolutely no effect on the economy. Picture this...you buy a dozen eggs for Lm1 only to get a reduction of 1.9c. How is that supposed to stimulate the economy?
Furthermore in order to reduce VAT, the government will need to cut down on spending from somewhere else. Either that, or else we are going to be left with an even bigger gap in our deficit which in the end will have to be paid by us by tougher taxes at a later stage.
ray pace
Nov 25th 2008, 14:33
Last week it was announced that petrol prices in Italy will be decreased during December to boost christmas sales and ease the burden on the italian people....but in Malta????? No Comment!
lgalea
Nov 25th 2008, 14:28
Remember what was said about the satellite dishes illegal tax?
We will remove it and replace it with another tax.
Nigel Lawrence
Nov 25th 2008, 14:28
Malta has NEVER operated in tune with the EU.
E. Anastasi
Nov 25th 2008, 13:44
I hope that government follows in the footsteps of the EU executive and governments of other member states and should it do so, I hope it won't neutralize a tax cut in one particular area by the introduction of some other tax in another area.
D. Micallef
Nov 25th 2008, 13:26
Joseph Muscat has been suggesting this to the government for the past weeks... REPEATEDELY.
Instead Tonio Fenech tried to make fun out of such a proposal, by saying he does not know of any government who is putting more money in people's pockets. Only yesterday tax cuts were reported in the UK.
Now that the EU has proposed such a measure, i am looking forward for Tonio Fenech's and Gonzi's reaction.
Once again, Muscat has been proven right.
peter camilleri
Nov 25th 2008, 13:24
OH MY GOD....SO THE EU AND OTHER EUROPEAN GOVERNMENTS ARE TAKING MEASURES TO LEAVE MORE MONEY IN THE POCKETS OF THE MAN IN THE STREET BE HIM TOM, DICK OR HARRY WHILST THE PN GOVERNMENT IS DOING EXACTLY THE OPPOSITE.....WAIT AND SEE WHEN WE RECEIVE THE UTILITILY BILLS AFTER CHRISTMAS.......THE GOOD FEELING AT CHRISTMAS TIME WILL QUICKLY PASS WHEN WE RECEIVE THE BILLS.....MIND YOU ALL DO NOT OVERSPEND!!!!
LINA MANGION
Nov 25th 2008, 12:57
IT HAS JUST BEEN REPORTED THAT THE ITALIAN GOVERNMEMT HAS BLOCKED THE TARIFFS ON TRAINS,ELECTRICITY AND GAS TO HELP THE CONSUMERS.
IN MALTA THE OPPOSITE IS BEING DONE FOR THE CONSUMERS, BY INCREASING THE WATER AND ELECTRICITY TARIFFS.
J. Henwood
Nov 25th 2008, 12:30
Let's see whether HSBC will be another let down and not reduce its base rate.... Still awaiting a reply on this Mr HSBC!!
J.Borg
Nov 25th 2008, 12:19
Maybe we get a 0.5% decrease in VAT to show EU that we are agreeing in principle......
and then to make good for that loss...we get some other new tax......
victor caruana
Nov 25th 2008, 12:05
Great. Our government needs a push and direction. Our government lacks grey matter. Thank God for the EU, for a change.
A. Saliba
Nov 25th 2008, 12:01
Excellent. And let's make these tax cuts permanent.