Changes in the fiscal policy of EU states after the 2008 crisis

The main reason for the introduction of fiscal surveillance was excessive deficit and debt levels in the member states. Fiscal surveillance introduced the concept of a significant deviation from the medium-term budgetary objective. In the euro area, the possibility of imposing financial sanctions in the case of such a derogation was introduced. The concept of expenditure benchmarks was also introduced to provide clear operational guidance to member states to help them plan their budgets. In the economic situation review, the Commission assessed the strengthened fiscal surveillance framework as effective. This surveillance has contributed to the consolidation of public finances. Most countries have met their medium-term budgetary objectives, and the number of countries under the excessive deficit procedure decreased from 23 in 2011 to 11 in 2014 and to 6 in May 2016. In turn, during the period under examination by the Commission, an average budget deficit of the EU-28 decreased from 4.5% of GDP in 2011 to a value close to 3% of GDP in 2014. The EU-28 budget deficit figures for 2015, already at only 2.4%

Data for 2015 from Eurostat [https://www.ec.europa.eu/Eurostat].

The new procedure has extended the surveillance of economic policies beyond budgetary issues and presently it concerns (i) external imbalances, (ii) competitiveness, (iii) asset prices, as well as (iv) internal and external debts. The new regulations (1174/2011 and 1176/2011) provide a framework for the detection, prevention, and correction of macroeconomic imbalances. During the period under review, the Commission has produced 42 in-depth reviews as the main element of the procedure regarding macroeconomic imbalances. In the years 2013 and 2014, the Commission identified excessive imbalances in four countries (Spain, Slovenia, Italy, and Croatia) but did not submit a proposal for their official identification by the Council, which resulted in the excessive imbalances procedure not being triggered. According to the European Commission [2014, pp. 7–9], the reform programs proposed by these countries were appropriate to the imbalances identified.

At the entry into force of the European Fiscal Compact, financial assistance related to the macroeconomic adjustment program was provided to four euro area member states: Greece, Ireland, Portugal, and Cyprus. Spain, however, only requested financial assistance to capitalize financial institutions. According to the European Commission [2014, pp. 9–11], these countries have made a significant progress in reducing their budget deficits and their total public debt is stabilizing. The situation of member states in the context of the Macroeconomic Imbalance Procedure is summarized in Table 1. When assessing the effectiveness of the measures taken by the EU institutions during the financial crisis, and in particular the adoption of the sixpack legislation and the Fiscal Stability Treaty, attention should be paid to reducing the number of countries in the excessive deficit procedure from the initial 11 to just one country, as of March 2018. Undoubtedly, reducing budget deficits below 3% is a step in the right direction. However, this is only a preliminary step toward debt reduction. It should be remembered that every budget deficit generates debt, even if it does not exceed 3%.

Only when a budget surplus is reached, it will be possible to reduce it gradually in the long term. According to Collignon [2013], the minimum level of fiscal consolidation should take into account the ratio of interest paid on debt to the total debt, which should not be higher than the amount of economic growth. Otherwise, there will be a permanent increase in the national debt. Despite adopting solutions making it possible to impose financial penalties on countries with excessive deficits, as of May 2016, the Commission had not taken such a step. Of course, the question arises to what extent potential financial sanctions in the form of an interest-bearing deposit of 0.2% of GDP are an effective mechanism to discourage deficit and debt reduction. Unfortunately, it is quite easy to imagine a situation in which a government planning a budget with excessive deficits is able to include an additional 0.2% as potential penalties.

The debt levels of EU member states, as well as their growth rates in 2008–2014, were higher than those of most non-EU OECD countries. Debt increased on average in non-EU OECD countries by 16% over the analyzed period, in old EU member states by 66%, and in new EU member states by 87%. Despite the highest debt growth rates in the new member states, the debt-to-GDP ratio is still at its lowest: 58% compared to 77.9% in non-EU OECD countries and as much as 95% in the old EU member states. It is worth noting here that debt at the level of 95% before the crisis occurred only in the Greek and Italian economies, but today this level or a greater one occurs in as many as eight countries (cf. data from Annex 1). The abovementioned figures show the scale of the problem, which has so far not been solved

A detailed classification of countries most affected by the global crisis based on other macroeconomic variables can be found in Dzikowska [2015].

Discretionary fiscal policy, as already indicated in the first subsection, is an important tool to reduce negative effects of financial crises. For EU member states, and in particular for the euro area, it is in principle the most important tool available to manage potential crises, mainly due to the lack of the possibility of running a separate monetary policy. This subsection focuses on the analysis of two aspects of fiscal policy in the EU states after 2008. The first aspect is the implementation of the European Economy Recovery Plan (EERP) and the second aspect is changing fiscal policy in terms of amending the structure of taxation

The study deliberately omitted the analysis of financial assistance to the financial sector. Between October 2008 and October 2014, the Commission issued more than 450 decisions authorizing government support to the financial sector. The Commission authorized (i) provision of guarantees of EUR 4.3 trillion, of which EUR 906 billion (21%) was actually provided and only USD 3.3 billion was utilized; (ii) financing of financial sector capitalization at the level of EUR 1.5 trillion, of which EUR 636 billion (43%) was used; and (iii) the value of guarantees in the form of government aid of only EUR 387 billion in 2013. The main objective of the financial assistance provided was to increase confidence in the financial sector.

The EC approved government aid in 22 countries, of which only 19 took it up. The aid was mainly targeted at small- and medium-sized enterprises and could not exceed EUR 500,000. An exception was made for the automotive sector, which received 25% of all aid granted to enterprises; this aid was targeted at six automotive companies: Ford, Volvo, Saab, Opel, Peugeot and Renault. The figures in Annex 3 are a summary of the approved aid per country and its actual use. It is clear that the final amount of EUR 36.4 billion of aid used was significantly lower than the original target by the EERP of EUR 200 billion.

Summary of basic changes in the structure of taxation, i.e. changes in tax rates made in the EU states in the years 2008–2015, is presented in Table 2. These data show a clear trend of increasing indirect tax rates, i.e. value-added tax (VAT), with a simultaneous reduction in the direct tax rates of corporate income tax (CIT) and personal income tax (PIT), mainly in the new member states. However, these changes can be considered as a clear trend toward a shift of the burden from direct to indirect taxation. An increase in VAT rates during an economic crisis is quite easy to justify by its easy collectability and the difficulty of avoidance compared to direct taxes. At this point, it is worth noting that no country in the EU has reduced VAT since 2008, and as many as 20 countries have increased it

In total, the VAT rate was increased in 22 countries, but in Romania and Latvia, the increase was only temporary, and the VAT rate is currently no higher in both countries than that in 2008.

Conversely, the reasons for the reduction in CIT rates can be seen in two areas: global tax competition and competition within the EU. In both cases, the governments compete in attracting foreign investors, i.e. creating favorable conditions for locating foreign direct investment in a given country [Wilinski, 2013, pp. 90–91]. In addition, as far as intra-EU competition is concerned, it is worth noting that there is a significant difference in CIT rates between the new and old EU member states, with median CIT rates of 19% and 28%, respectively, which gives a difference of 9% points. Owing to the competitive rates in the new member states, the countries of Western and Southern Europe have been forced to reduce their CIT rates. A very good example of this is the reduction in CIT in Austria, even before the financial crisis, from 34% in 2004 to 25% in 2005.

The reason for this action by the Austrian government was the 2004 accession of the new member states neighboring Austria: the Czech Republic (28% CIT), Slovakia (19% CIT), and Hungary (17.6% CIT) [Eurostat, 2015]. It should be remembered, however, that the decisions of the governments of the old member states are taken not because they fear the relocation of production but to create more favorable conditions for development of local businesses. Taking into account the abovementioned reasons, it does not seem entirely clear what guided the French government to raise the already high CIT rate to 38% during the financial crisis while raising the VAT rate by only 0.4% points to 20%.

The analysis of the changes carried out in the tax rates of both direct and indirect taxes should also take into account the impact of each of these taxes on the structure of the state budget revenue. As already mentioned, there is now a clear trend in EU countries toward gradually increasing the importance of indirect tax revenues, while the importance of direct tax revenues is declining. Such an analysis is even more interesting if we compare the policies of individual governments in this area in the new and old member states. As shown in Annex 5, in the vast majority of the new member states, the share of revenue generated by indirect taxes is higher than in the old member states.

Such a fiscal policy in new EU member states allows for the application of lower direct tax rates, which, as has already been mentioned, is particularly important in the case of the amount of CIT and its impact on the location of foreign investments, as well as on the rate of domestic capital accumulation. It is worth noting that there is currently global tax competition in the area of corporate taxation. Therefore, the objective of the tax policy of the new member states is not to compete with the old member states but above all to meet global competition, which the old member states should also remember.

France and Belgium are the only EU states with debt exceeding 90% of GDP and at the same time with the highest CIT rates (38% and 34%, respectively, see data in Annex 4). At the same time, these countries have the lowest budget revenues from indirect taxes and relatively low VAT rates of 20% and 21%, respectively. In the context of the analysis of changes in fiscal policy that are taking place in EU countries, and in particular taking into account the change in the structure of budget revenues, it would be advisable in both countries to increase VAT rates and, at the same time, to reduce CIT rates.